Private credit has spent a decade rising from niche alternative to central pillar in global finance. It has become a multi-trillion-dollar engine of corporate lending, infrastructure finance, asset-based credit, specialty finance, and opportunistic capital. While financial regulators have so far taken a relatively hands-off approach, elements of the market and the financial press have raised concerns about longer-term risks arising from the growth in private credit.
If we had to define the mood for 2026 in three words, we would choose alert, intentional and institutional. After several years of normalizing longer hold periods and navigating evolving regulatory frameworks, 2026 will see managers permanently vigilant – vigilant in pursuing value creation theses, identifying exit opportunities and embedding robust governance structures to mitigate litigation and regulatory risks.
An action recently filed in the Delaware Court of Chancery challenging a continuation vehicle transaction offers a rare public window into a dispute over a GP-led transaction. The complaint alleges issues around valuation, disclosure and economic terms, and highlights the conflicts and process risks that can arise in these transactions.
Times of economic volatility often increase disparities between a seller’s valuation and the buyer’s valuation of the same company. Earn-out provisions are one tool frequently used to address such disparities. An earn-out provision requires the buyer to make one or more post-closing payments (the “earn-out consideration”) to the seller if the company being sold (the “earn-out entity”) meets certain milestones during a defined post-closing period (the “earn-out period,” which is usually between one to five years). These milestones may include EBITDA, gross revenue, net income, the expansion of the business into defined geographic or product areas, or other metrics.
Private credit has become an essential source of financing globally, with fund sponsors enjoying strong demand from borrowers, market participants, and investors. However, as the industry’s “golden age” continues, regulatory scrutiny is growing. Media coverage and legislative inquiries have pressured agencies — particularly the SEC — to take action.
The “Liberation Day” tariffs and associated countermeasures have created significant market volatility, prompting renewed scrutiny of private fund managers’ compliance with longstanding SEC focus areas such as valuation, investor communications, liquidity, borrowing and related disclosures. Sponsors should document any changes to valuation practices, maintain transparent and timely communications with investors
Big fund-raising rounds and high valuations have some wondering whether the AI sector is in a bubble in the nature of the dotcom boom. As of this writing, OpenAI is valued at over $80 billion; Amazon added another $2.75 billion to its investment in Anthropic; and even some very early-stage startups, like France-based Mistral AI, have racked up hundreds of millions in venture-capital funding at valuations over a billion dollars. Alphabet CEO Sundar Pichar has said AI could be more profound than the invention of electricity or the discovery of fire. Is the hype real?
Adviser-led secondary transactions have seen explosive growth over the last five years. That growth has brought increased regulatory concerns over the conflicts of interests inherent in these transactions and a perceived lack of transparency into this market. New SEC rules adopted in 2023 will arm regulators with additional tools to identify, exam and investigate market practices. It is therefore critical for managers running an adviser-led secondary transaction to not only comply with the new rules as they become effective but to structure any such transaction with the SEC’s concerns in mind.
Economic headwinds and the interest rate environment that developed over the course of 2023 increased financial stress on portfolio companies and portend heightened litigation risk in 2024 for portfolio companies and their private fund sponsors. Specifically, interest rate increases that accelerated through 2022 continued in 2023, and compounded existing economic stressors including tight liquidity and inflation coming out of 2020 and 2021, as well as increased cost and other burdens related to ESG and regulatory compliance. These pressures put portfolio companies in often unsustainable financial positions, causing them to prematurely seek liquidity events, violate debt covenants with lenders, and resort to bankruptcy, all of which has led to an increase in disputes and litigation, which we expect to continue in 2024.
Amid rising interest rates, tightening credit markets, geopolitical concerns in Europe and Asia, stubborn inflation and continuing supply chain issues, there is a growing sense of economic uncertainty. This uncertainty will no doubt increase the frequency of valuation disputes in the year ahead. We generally see valuation disputes spring from four primary sources:
Valuation disputes tend to be centered on disagreements about accounting practices, dates of assessed value, and valuation methodology.