SEC staff warn private credit funds on valuations as fund holdings hit $270 billion, up nearly 60% since 2020

Two senior Securities and Exchange Commission officials on Monday issued what they called "a critical reminder" to funds holding private credit: value those loans rigorously and tell investors plainly how they did it. The statement came from Chief Accountant Kurt Hohl and Brian Daly, director of the Division of Investment Management, and was first flagged by Seeking Alpha.

The staff said private credit held inside registered funds grew from $170 billion in December 2020 to $270 billion in December 2025, a rise of nearly 60%. The reminder is aimed at registered closed-end funds, interval funds, tender offer funds and business development companies, the vehicles that sell private credit to ordinary investors, and also at their auditors.

What it is, and what it is not

The easy headline is "SEC cracks down on private credit." That is not what happened. This is a staff statement, not a rule and not an enforcement action. It restates existing accounting requirements under the standard for fair value, known as ASC 820. Nothing changes in how these funds are allowed to operate tomorrow.

What makes it worth reading is where the staff chose to point. A regulator does not usually publish a reminder about rules that everyone is following well.

The line that matters: cash interest versus added interest

The most pointed section is about payment-in-kind interest, or PIK. That is when a borrower does not pay interest in cash and instead adds it to the loan balance. The fund still books it as income. The staff said disclosure should let investors "distinguish between registrants generating cash income from their investment portfolio and those where a meaningful portion of reported income reflects capitalized interest," which it noted "increases the registrant's exposure to the borrower rather than providing current cash returns."

In plain terms: a fund can report a healthy yield while some of its borrowers are not actually paying. The staff wants funds to say how large that share is, whether it is growing, and what it may signal about borrowers' finances. It asked for the same clarity on loans placed on non-accrual, and on loans that were modified, restructured or extended in ways "that might not be readily apparent from high-level portfolio statistics."

It also warned that "boilerplate" or overly aggregated disclosure may not be enough, and that a lack of timely information from a borrower "does not relieve management of its responsibility to estimate fair value."

The NAV point

The second notable section covers funds that value holdings in other private funds at the net asset value those funds report. The staff reminded managers that this shortcut is optional and that it cannot be used if it is probable the holding will be sold for a different amount. It noted that the growing secondary market for private fund stakes is producing prices that managers should consider.

That matters because traded prices and reported values have been drifting apart. We covered the Palmer Square BDC trading below its NAV and Apollo Debt Solutions receiving exit requests for 14.7% of its shares while paying out 5%. When investors want out faster than a fund can pay, the reported NAV is the number they are waiting on.

Who it hits

Two groups. Investors in non-traded BDCs and interval funds are the direct audience; the next annual reports are where to look for new detail on PIK income and non-accruals. Mid-sized companies that borrow from these funds are the second. With the 10-year Treasury yield at 5.18% on Monday afternoon, borrowing costs are not easing. A borrower that has been paying in kind to save cash may find its lender now has to explain that choice to its own investors.

Nothing here names a fund or alleges a problem. It tells auditors to apply "professional skepticism" and not to rely on old assumptions "in times of market disruption." Track rates on the markets board.

Sources: SEC staff statement; Seeking Alpha. Staff statements are not rules and have no legal force. This is market information, not investment advice.