Private Credit Valuations Under Pressure: How to Approach Standard Loan Marks

Private markets have long been seen as quieter than public markets, with fewer price ticks and less pressure to mark assets daily. However, as private credit expands and faces a volatile macro environment, valuation is now more visible, frequent, and consequential.

This four-part series, inspired by a recent S&P Global webinar with Peter Alleston (Product Manager, Private Market Valuations) and Abhinav Tickoo (APAC Delivery & Consulting Lead), will guide readers through the evolving complexity of private market valuations:

• Part 1: Valuing private credit structures during market stress
• Part 2: Direct & indirect (fund) private equity investments
• Part 3: Complex equity & debt (complex capital structures, equity kickers)
• Part 4: Structured credit (private ABS and CLOs)

Why Valuations Are Under Pressure

The current market is testing old assumptions. Volatility from technology disruption, policy uncertainty, and geopolitical shocks is exposing weaknesses in corporate credit. Headline default rates may understate real stress, especially when “selective defaults” and liability management exercises, like PIK features and maturity extensions, are considered.

Valuations are now central to risk reassessment for LPs, boards, regulators, and auditors. As liquidity dries up or redemption pressure rises, valuation becomes the lens through which risk is measured.

Semi-Liquid Structures: More Frequent Valuations

The rise of semi-liquid structures (BDCs, evergreen funds, interval funds) has increased expectations for frequent NAVs. Because investors can subscribe and redeem on a regular schedule, the fund must publish NAV frequently enough for transactions to occur at a fair price. At the same time, the underlying loans remain illiquid, which means managers cannot rely on market transactions alone to support those NAVs.  As a result, semi-liquid structures create greater demand for valuation processes that are more frequent, consistent, and well-documented, even when the assets themselves do not trade regularly.

Private Credit: Liquidity Is the Challenge

Direct lending to corporates and SMEs may seem straightforward, but the illiquidity of these assets makes price discovery more difficult.  Private credit investments are generally marked using one of the following approaches:

1. Par + accrued: Some usefulness for performing loans but less relevant when credits deteriorate.
2. Amortized cost less impairment: Common in hold-to-collect frameworks, but impairment reviews can lag rapid risk changes.
3. Fair value (exit price mindset): This is the most useful basis for NAV reporting, and the standard used by most private credit funds, but it is also the hardest to estimate because valuations are typically model-driven. It requires a robust valuation framework, significant judgment in key inputs, and outputs that remain anchored to current market conditions, all of which increase estimation uncertainty.

Investors want fair value marks that reflect changing conditions, but private credit trades infrequently and privately. In stressed markets, credit monitoring becomes central to valuation. The webinar highlights “the growing importance of credit monitoring within the valuation process,” noting that “valuation cannot be divorced from what’s happening in the credit” as conditions deteriorate. In practice, this means tighter tracking of borrower financials and early signs of weakening credit quality, feeding credit risk models and other indicators into the valuation process. When credit profiles shift, the valuation marks should adjust via issuer-specific spreads/discount rates, rather than relying on stale, issue-date assumptions.

Fair Value Toolkit: Calibrate and Monitor

For performing loans, fair value is typically derived using a Discounted Cash Flow (DCF) approach:

• Day 1 Calibration: Anchor the model to issuance terms, reflecting market conditions at origination.
• Spread Updates: Adjust for quantitative (financial performance, leverage) and qualitative (business risk, sector dynamics) changes, plus market spread movements.

Model discipline is key: teams must clearly document what changed and why, maintaining an audit trail that justifies the approach to stakeholders.

Benchmark Selection: A Critical Step

Benchmark selection is a key driver of valuation outcomes. S&P Global constructs bespoke benchmarks from a proprietary dataset of 130,000+ bonds and 8,500+ traded loans, screened by factors such as geography, sector, rating, seniority, and maturity.  Where relevant, additional proprietary datasets such as sector curves and iBoxx indices, may also be used to inform benchmark selection.

Ultimately, both methodology and benchmark selection require judgment and must be tailored to the specific facts and circumstances of the asset, including its structure, performance, and credit profile. But that flexibility has a clear consequence: two managers can apply the same DCF framework to the same loan and still arrive at different marks, driven by differences in benchmark selection and views on the borrower’s credit quality.

Regulators have recognized this valuation dispersion as a key risk, reinforcing the importance of consistent methodologies, robust benchmark governance, and well-supported credit assumptions.  These practices are essential to improving comparability, strengthening valuation defensibility, and reducing avoidable NAV variability.

Non-performing Loans: Recovery Takes Center Stage

For non-performing loans, the valuation focus shifts away from yield-based approaches and toward recovery-based analysis.  Common methodologies include:

• Enterprise value + waterfall analysis: Estimate the borrower’s enterprise value and allocate that value across the capital structure based on the priority of claims.
• Collateral-based recovery analysis: Assess the value of the underlying collateral, adjusting for factors such as time to sell, enforceability and claim seniority.

Distress turns otherwise straightforward loans into far more complex valuation exercise.

Valuation Governance Matters as Much as the Number

Auditors and regulators now place as much emphasis on the valuation governance process as they do on the final number itself. This means having a robust valuation policy, clearly defined roles and responsibilities, strong product expertise, effective independent challenge, and governance structures that mitigate conflicts of interest through independent valuers and valuation committees.  These elements are critical to producing valuation outcomes that are not only reasonable, but also defensible, consistent, and repeatable. 

Firms with strong valuation governance are better positioned to withstand audit and regulatory scrutiny, particularly in volatile markets where valuations become more judgement intensive. As expectations around transparency, independence, and valuation discipline continue to rise globally, robust governance helps reduce surprises when scrutiny intensifies.

Looking Ahead

Valuation scrutiny is not limited to private credit. Private equity is also coming under the spotlight as market uncertainty, longer holding periods, and divergent exit conditions challenge traditional assumptions. In Part 2, we’ll explore private equity direct and fund investments, including valuation methodologies, key areas of judgment, and the oversight practices institutional investors can use to assess manager-provided marks and strengthen confidence in reported valuations.