Exclusive: Warning: This Article May Shatter Any Remaining Faith in BDC Valuations

BDCs Valuation games: Many examples of unjustifiable valuations

I have been critiquing BDC valuations for over a year.

BDC valuations recently punctured headlines with a one-two punch from Blackrock’s TCPC fund. They first announced one loan’s fair value dropped from 100 to 0 in one quarter (Renovo). Following that announcement, they announced a 20% drop in the NAV of their fund. In one quarter. That was followed by another 100 to donut valuation drop - in one quarter. Any reasonable definition of fair value and these events don’t happen. Fair value should incorporate incremental credit deterioration and not expose investors to cliff drops in value.

This artificial, stage managed fair valuation process is a feature, not a bug of the private credit / private equity ecosystem.

It is what enables the system to launder volatility. It allows them (BDCs and private assets writ large) to report better risk adjusted returns. It allows them to earn higher fees on the higher valuation and the artificially inflated performance.

This creates a soothing synthetic layer of stable, high returns, which is stable until it isn’t. And then it cracks like a Mike Tyson left hook.

Background: Summary of my prior articles addressing valuation

I first raised the issue of BDC valuations over a year ago in a post on PluralSights, the troubled EdTech company:

“,,,most of the private credit holders carried the [PluralSights] debt near 100 through Q1, 2024 (Golub carried at par), despite many warning signs emerging through 2023, including Vista marking down the value of Pluralsight by 50% in Q1 2023. The delayed markdowns resulted in a 50% plunge in valuations in just one quarter.”

Six months ago, I called into question valuations related to Blackstone’s BXSL BDC: I observed that 200 out of 600 BXSL loans were valued precisely at par. This is not the distribution of a reasonable fair value process. A proper valuation process for BDC loans, which are deep junk quality, WOULD NOT produce 1/3 of assets exactly at 100.

BXSL’s fair value approach isn’t unusual - it is the rule rather than the exception.

I further noted a practice where BXSL was buying debt at a discount and subsequently valuing them at par. Again, a practice I find at odds with my understanding of fair value. Their immediate valuation at 100 created value accretion that flatters performance and Blackstone’s fees.

I also pointed out anomalies on KKR’s BDC which reported several loans on non-accrual, yet the more senior loans were valued near 100. At a minimum the discount rate used to value the loan should have increased materially resulting in the senior loan to be valued at a discount. But no.

However, I have not even scratched the surface of bad BDC valuations.

Why it matters

As goes BDC loans, so goes underlying portfolio companies

$500B in BDC debt supports roughly $1T in enterprise value of the portfolio companies. Any BDC debt valued at a material discount implies a significant degradation or zero equity value.

Valuation impacts BDC borrowings

Another important aspect of valuation relates to the debt issued by the BDCs. Every BDC issues a large $ amount of secured and unsecured debt. When JPM or Wells lends to a BDC, they must take care that the underlying loans are properly valued to ensure that their margins are protected. Is it possible that the secured lenders are doing a far more rigorous valuation process? Of course, lenders and the BDC companies could differ on valuation but if the lenders systematically discount the same collateral the BDCs value at 100 – Houston we have a problem.

In an FT story today, JPM announced that they were increasing scrutiny of private credit loans. To the extent JPM marks down loans that the BDC reports at par, BDC investors could be exposed to NAV erosion if the secured lender (JPM or otherwise) increases haircuts and rejects riskier loans.

Many cases of loans valued at 100, where the borrower defaulted

Expanding on my earlier research I found 10 cases across 6 BDCs of loans valued at 100, where the borrower defaulted on another loan. I highlighted these cases as the closest I can think of to validated the broken fair value process. A borrower who defaulted on one loan, signals a degree of distress that should transmit to material fair value declines of all loans by the borrower.

While these are only 10 examples, If a borrower with a defaulted loan has another loan valued at 100, how much trust can we place in the valuation of the other loans? Not much at all I would argue.

The below chart reveals the borrowers, BDCs and prices. All data was sourced directly from the BDC filings. My team and I are building a BDC database and front end to make analyzing these BDCs much easier.

I filtered the data for 1) borrowers with one defaulted loan valued at a steep discount which had other “performing” loans valued at or near 100, 2) The defaulted loan was valued at least 30 points lower than the more senior loan valued at 100, 3) I excluded cases where the loan maturity was imminent.

Other Dubious Valuation Cases: Ares ARCC and Main Street’s MAIN – loans well past maturity date, valued at 100

An ARCC owned credit, Safe Home Security, Inc., was reported in September, 2025 10Q valued at 100, yet the loan matured May 2025. So…. A loan 4 months past due was valued at 100. Doesn’t seem right if you ask me. In Q4 2025 that same loan was still valued at 100, with the maturity changed to 2026. This was not a refinanced loan. Had the borrower refinanced, the maturity would likely have been 3-5 years. The fact that the maturity was rolled forward only a few months, tells me something is going on with this borrower. At a minimum it signals a borrower having trouble rolling over their loans. Investors are left with a possibly false narrative of a performing loan valued at 100.

I found a similar example with MAIN. As of their Sep 2025 report they had a large loan valued at 100 that was supposed to have matured Jan 2025. 9 months past due. Valued at 100. Something is wrong with this picture. At a minimum the borrower is having trouble refinancing and shouldn’t be valued at 100.

A footnote revealed that the loan maturity extension negotiations was under way. I reviewed the Dec 2025 filing and found the same. A loan one year past maturity still valued at 100 is just wrong regardless of whether maturity extension discussions are ongoing. A couple months? Maybe OK. Not a year.

The next section adds a bit of high level context to the rules and regulations and stated valuation policies related to valuations. In my view it reveals that the valuation practices are not consistent with the regulatory, accounting and policies’ fair value process.

The Inconvenient Truth: BDC Valuation Practices seem at odds with Accounting and SEC Fair Value rules

The below is meant to be a brief overview of the accounting, SEC regulations and BDC stated policies. It is meant to show that actual valuations observed in the wild are seemingly at odds with the accounting, regulations and the BDC’s own policies.

SEC Rule 2a-5 sets out the guidelines for fair value methodologies.

According to Wilkie Farr a key requirement of 2a-5 fund valuation rules includes “testing the appropriateness and accuracy of the fair value methodologies selected.” Clearly this doesn’t seem to be happening.

The Accounting:

ASC Topic 820, defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants.

Clearly both the 2a-5 rules and the accounting ASC Topic 820 do not allow a fair value at par simply because the loan is illiquid. While direct observable market inputs may not be available, that does not grant carte blanche for BDCs to wantonly dismiss any indication of external factors simply because it’s inconvenient.

Finally, below is directly from the valuation policies of one particular BDC:

“Other factors that may be considered include the borrower’s ability to adequately service its debt.”

Based on this criteria, clearly a borrower in default or that has trouble rolling over their maturing loans, would result in a reduction of fair value for all loans by the borrower. But that ain’t happening.