Private Credit Litigation Update: Amended Complaints Sharpen Theories Against BDC Advisers
In June 2026, we published Emerging Litigation Risks in Private Credit, which described a new wave of lawsuits against business development companies (BDCs) and their advisers. Over the past year, BDCs have continued to garner attention from investors, regulators, and the plaintiff’s bar due to, among other things, a rise in payment-in-kind (PIK) interest, an increase in the number of loans on non-accrual, and a reduction in share value in relation to reported NAV. Several of the resulting suits have now moved into the amended or consolidated pleading stage, and the amendments show how plaintiffs are adapting their theories in anticipation of motions to dismiss.
At a high level, the amendments to the original complaints do three things: (1) in the excessive-fee cases, they recast the adviser’s valuation work as a core service that the fund pays for, so that inflated valuations become an excessive-fee problem rather than a separate accounting dispute; (2) in the securities cases, they add detail explaining how restructurings and non-accrual classifications allegedly made portfolios appear stronger than they actually were; and (3) across both types of cases, they add borrower-level examples and, in at least one case, new defendants.
Section 36(b) Excessive-Fee Litigation
The excessive-fee suits are brought under Section 36(b) of the Investment Company Act, which makes an adviser of a BDC a fiduciary with respect to the fees it receives and allows shareholders to sue on the fund’s behalf to recover fees so large that they could not have resulted from arm’s-length bargaining. Courts traditionally evaluate these claims by comparing the size of the fee to the services provided. Two recent amended complaints related to private credit attempt to bring valuation-related services into that framework. Both allege that the adviser’s valuation role is neither collateral nor incidental to the advisory services for which it is paid. The reasoning articulated in the complaints is that in a BDC, the same adviser that is paid based on asset values also decides what those values are. If the asset values are too high, plaintiffs argue, the fees are too high as well.
The amendments also lean more heavily on a traditional excessive-fee theory: that the advisers kept the savings from the fund’s growth (economies of scale) instead of sharing them with shareholders. For example, one of the amended complaints alleges that advisory fees grew 47% (from $282.4 million to $414.4 million) between 2021 and 2025 while the BDC’s gross assets grew approximately 35%, and that the advisory fee structure has no breakpoints that lower the fee rate as the fund grows.
Both complaints also tie the excessive-fee claim to PIK income. Because PIK interest counts as income when it is booked, it increases the income on which the adviser’s incentive fee is calculated in addition to the management fee; because it is added to the loan balance, it also increases the asset base on which the management fee is calculated, even though the fund has received no cash. Plaintiffs allege that the advisers are paid these fees in cash each quarter and need not return them if the borrower never repays the BDC (that is, there is no “clawback”).
Other changes appear designed to head off defenses that advisers are likely to raise in their motions to dismiss. Most notably, both amended complaints state that plaintiffs do not seek to enforce Rule 2a-5 (the SEC rule governing how funds determine fair value) directly, and do not contend that these categories of businesses and assets are improper in and of themselves. This disclaimer appears aimed at an anticipated argument that the claims are, in substance, an attempt to second-guess the fair-value judgments that the Rule commits to the fund’s board and its valuation designee, and that Section 36(b) is not a vehicle for enforcing that rule. By disavowing any such challenge, plaintiffs seek to keep the focus on the size of the fees relative to the services provided, arguing instead that rigorous fair-value accounting practices are required by law even when the investments are long-term. The recasting of valuation as a core advisory service, as described above, reinforces the same point: if valuation is part of what the advisor is paid to do, then challenging how it was performed becomes a challenge to the fees rather than to the board’s fair-value determinations.
The amendments add other theories as well. They allege that the board’s annual review of the advisory agreement under Section 15(c) of the Investment Company Act did not consider the adviser’s valuation services or seek breakpoints, total-return limits, or PIK clawbacks. One of the amended complaints further alleges that the adviser’s own regulatory disclosures acknowledge that markdowns reduce its management fee, and that shareholders effectively pay additional layers of fees through incentive fees on fees collected from portfolio companies and through an affiliated asset manager.
Securities Class Actions
The amended pleadings in the securities class actions against BDCs develop the restructuring theory that appeared in the original complaints, adding more detail on how restructurings and non-accrual classifications of loans allegedly made credit quality look better than it was. In those cases, plaintiffs allege that when a troubled loan was restructured, the old loan came off the non-accrual list and was replaced with new debt or equity carried at or near full value, allowing the company to report improving credit metrics even though it had not been repaid and the borrower’s business had not improved.
In one of the pending securities cases, a recent amended complaint adds the BDC’s advisers, affiliated parent entities, and additional individual officers as defendants and alleges a scheme to conceal credit deterioration in order to preserve advisory fees. In another, the amended complaint now alleges that the BDC overstated NAV through a repeated sequence: when a troubled loan was restructured, the company recorded a loss on the old loan, reversed write-downs it had already taken (so the net effect looked neutral), and then carried the new instruments at or near their new cost, in several instances at 100% of principal. These restructurings also removed positions from non-accrual status, which the company then cited as evidence of improving credit quality. This amended complaint also adds scienter allegations, including a U.S. Department of Justice investigation discussed by several news outlets into the BDC’s valuation practices and its CEO’s subsequent departure.
Considerations for BDC Advisers, Boards, and Sponsors
The amended pleadings suggest several subjects that BDCs, their advisers, and their boards may want to consider:
1. Board 15(c) records. Plaintiffs are scrutinizing whether boards expressly considered the adviser’s valuation services and whether fee terms kept pace with asset growth, which may make the content of renewal materials and minutes worthy of attention.
2. Fee design. The absence of breakpoints, total-return limitations, and PIK clawbacks are being pleaded as evidence that terms could not have resulted from arm’s-length bargaining.
3. Restructuring disclosures. Statements characterizing restructurings as “de-risking” or “resolution,” removals from non-accrual following restructurings, and pro forma non-accrual metrics, have drawn particular attention in the recent securities cases, as has the treatment of continuing exposure, PIK dependence, and post-period developments.
4. Cross-holder valuation comparisons. Plaintiffs are using marks assigned by other BDCs to the same instruments as a point of comparison, which may draw attention to material divergences in valuation by the named defendant BDC and others in the industry.
5. Sponsor exposure. By adding the BDC’s advisers and their affiliated parent entities as defendants, one of the amended securities complaints reflects plaintiffs’ willingness to reach beyond the BDC and its officers, while another amended complaint targets a publicly traded sponsor directly, including over its own acquisition strategy.
Forthcoming rulings on the motions to dismiss discussed above will clarify whether courts accept the theory that valuation is a fee-bearing service that can support a Section 36(b) claim, and whether restructuring and non-accrual statements can support securities claims, including whether plaintiffs have adequately pleaded the required intent (scienter). These rulings could also influence whether additional, similar suits are filed against BDCs and their advisers.
Mayer Brown closely tracks litigation and regulatory trends in private credit and would be happy to discuss these developments and their potential implications.
This Legal Update is provided for informational purposes and does not constitute legal advice. The allegations described are those of the plaintiffs and have not been adjudicated.
