Emerging Litigation Risks in Private Credit

Private credit in the United States has grown from roughly $41 billion in 2000 to an estimated $1–$2 trillion today. Some projections anticipate growth globally to $5 trillion by 2029. Funds now compete directly with traditional bank syndications, and retail participation has expanded significantly through business development companies (“BDCs”), whose total assets reached $438 billion by year-end 2024.

Recent reports of stress in the private credit market have and will continue to spawn litigation. Redemption rates are experiencing increasing upward pressure, with non-traded BDCs receiving requests exceeding standard 5% quarterly limits. Several major firms have capped redemptions. Publicly traded BDCs are down approximately 16% over the past year, with some declining as much as 50% and trading at a roughly 20% discount to reported NAV. While the current moment may well reflect recalibration rather than crisis, stakeholders should use this time to assess and mitigate their litigation exposure.

This Legal Update explains the predominant types of litigation that recent developments in the private credit market are likely to generate, and identifies practical steps for stakeholders to take to mitigate their exposure.

1. Securities-Related Claims Against BDCs

BDCs and their executives are beginning to face class action lawsuits under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. In those cases, investors allege that BDCs made material misrepresentations about liquidity, NAV, and portfolio health, concealing deteriorating conditions to keep share prices artificially elevated.

Recent filings show the breadth of theories that plaintiffs are pursuing. Courts in the Southern District of New York, Central District of California, and Northern District of California have seen complaints alleging misrepresentations about redemption pressure and liquidity constraints, claims that portfolio investments were not timely or appropriately valued and that NAV was overstated, and allegations that companies overstated the rigor of their deal sourcing and loan origination processes.

What to do now: Ensure that public communications—including regulatory filings, press releases, earnings calls, and other presentations to securities analysts, portfolio managers, and investors—accurately reflect portfolio value, the redemption environment, and valuation methodology. Review D&O insurance to confirm coverage matches the risk of disclosure-related litigation.

2. Contractual and Related Disputes Arising from Redemptions

Private credit funds typically cap redemptions at around 5% of NAV per quarter, with fund boards retaining broad discretion to fulfill redemption requests, go above the stated cap, or reduce or suspend redemption requests. Given the absence of a robust secondary market for the underlying loans, an individual fund’s assets may be considered to have limited liquidity. Funds fulfilling redemption requests at or above the stated cap may therefore sell these illiquid loans at a steep discount to pay departing investors, at the expense of non-redeeming investors’ returns.

In addition to securities fraud and related disclosure-based claims referenced above, investors may pursue additional theories. For example, investors may assert breach of fiduciary duty claims by alleging that a manager prioritized its own economic interest—for example, by failing to manage the portfolio in a manner consistent with the fund’s stated investment objectives and risk parameters. This theory has been pursued in the derivative context as well: in April 2026, a shareholder of a publicly traded BDC filed a derivative suit against the company’s investment adviser, alleging that the adviser breached its fiduciary duties through, among other things, failure to adequately manage the portfolio in the face of mounting redemption pressures and liquidity constraints. Investors may also bring claims for breach of the duty of fair dealing or violation of partnership agreement provisions by alleging that other investors received preferential redemption terms—such as accelerated processing of redemption requests.

What to do now: Ensure redemption policies and communications are transparent and consistently applied across all investor classes. Document the rationale for any redemption decisions, particularly where requests exceed available liquidity.

3. Fiduciary Duty and Related Claims Against Fund Managers

Fund managers may face breach of fiduciary duty claims when investors allege failures in due diligence, borrower monitoring, or timely enforcement of remedies. Continuing to finance failing borrowers, delaying restructurings, or mishandling enforcement of security interests can all give rise to negligence claims, particularly where poorly structured agreements or weak monitoring allegedly compound losses.

Valuation is a particular flashpoint. Because funds typically charge management fees based on NAV, plaintiffs argue that managers are incentivized to maintain or inflate valuations even as underlying loans deteriorate. Regulators have taken notice: former SEC Chair Jay Clayton, now US Attorney for the Southern District of New York, has warned that “sketchy marks” have “drawn prosecutorial attention,” signaling that valuation practices are moving from supervisory concern to potential enforcement priority.¹

What to do now: Implement robust, consistent, and well-documented valuation procedures. Maintain close monitoring of borrowers’ financial health and ensure that fee structures do not create conflicts that undermine valuation integrity. Consider providing fund investors with valuation information more frequently.

4. Accessorial Liability Claims Against Service Providers

Valuation agents, auditors, fund administrators, and credit rating agencies all face the prospect of litigation based on their roles in the private credit ecosystem. Valuation agents risk claims for flawed methodologies or inflated valuations. Auditors face exposure for failure to detect misstatements or flag going-concern risks—particularly where payment-in-kind (“PIK”) arrangements limit the appearance of instability. Fund administrators may face potential claims alleging NAV mispricing or redemption processing errors, and credit rating agencies may face claims for inflated ratings that contributed to investor losses.

Regulators are already acting. In early 2026, the SEC settled with an adviser that sold performing loans at par during market dislocation without reassessing fair market value, resulting in a $900,000 penalty. These actions may be precursors to broader enforcement as market losses materialize.

What to do now: Review contractual protections (including indemnification and limitation of liability clauses), ensure compliance with professional standards, and carefully document methodologies and decision-making processes.

5. Borrower-Insolvency-Related Claims

When distressed borrowers file for bankruptcy, lenders that received transfers from the debtor can be targeted in fraudulent transfer litigation—on the theory that transfers were made while the borrower was insolvent without receiving reasonably equivalent value in return. This risk is especially acute in liability management exercises (“LMEs”), where lenders restructure credit arrangements through credit agreement amendments. As private credit has expanded to include larger lender groups, intra-creditor disputes—historically more common in the broadly syndicated loan market—are becoming routine. Non-pro-rata LMEs are likely to attract allegations that favored lenders benefited at the expense of minority holders, giving rise to inter-creditor litigation or what the industry has referred to as “lender-on-lender violence.”

What to do now: Monitor borrowers’ financial health on an ongoing basis, independently verify collateral, and ensure precision in credit agreement drafting—particularly in amendment and LME provisions that govern inter-creditor rights.

Conclusion

Litigation against BDCs and asset managers has already begun, and similar claims will likely increase in the coming months. These early cases will shape the legal landscape for private credit for years to come. But businesses in this space do not need to wait for courts to set the rules; proactive steps—such as accurate disclosures, rigorous due diligence, ongoing borrower monitoring, and precise credit agreement drafting—can significantly reduce exposure. The firms that act now will be best positioned to weather the litigation cycle ahead.

¹ Sridhar Natarajan, Private Credit’s Sketchy Marks Get Warning Shot From Wall Street’s Top Cop, Bloomberg (Nov. 25, 2025).