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Private credit is a durable and increasingly important source of borrower financing and investor income. For investment advisers using private credit with their clients, it’s important to emphasize suitability and risk as much as return potential.
Published on October 8, 2026
By Travis Pearson
Managing Director, PLL
6-minute read
What is private credit?
Private credit refers to loans and other debt-like financing provided by non-bank lenders rather than traditional commercial banks or publicly traded bond markets. These arrangements are usually negotiated directly between lenders and borrowers, which allows terms, covenants, collateral, pricing and reporting requirements to be tailored to the borrower and the lender’s risk appetite.
After the Great Recession, private credit expanded significantly as banks reduced certain types of corporate lending; that led private investment firms, asset managers, insurance platforms and business development companies to fill part of that financing gap. The result is a large and varied market spanning senior direct lending, unitranche loans, mezzanine debt, asset-based lending, specialty finance and opportunistic or distressed credit.
The important point for investment advisors is not just that private credit is “private”; the relevant advisory question is whether the client understands that these instruments generally trade less frequently, rely more heavily on manager valuation, may include complex fee arrangements and can have liquidity terms that differ materially from traditional fixed-income funds.
WHY THIS MATTERS: Clients may focus on income and manager reputation while underestimating redemption limits and the inability to exit quickly during stress.
The investment case for private credit
Private credit can offer attractive income, negotiated creditor protections, portfolio diversification and exposure to borrowers that may not access public debt markets efficiently. Direct lending structures may also give managers closer information access and greater influence over amendments, restructurings and downside outcomes than many broadly syndicated or public-market strategies.
WHY THIS MATTERS: Risks can still concentrate by borrower quality, sector, sponsor, loan structure, vintage and manager underwriting discipline.
Those benefits should be described with appropriate balance: higher yields may compensate investors for illiquidity, complexity, leverage, borrower concentration, documentation risk and valuation uncertainty. Private credit can produce smoother reported returns than public debt, but smoother marks do not necessarily mean lower economic risk.
Clients may focus on income and manager reputation while underestimating redemption limits and the inability to exit quickly during stress.
Common vehicles that investment advisors encounter
Business Development Companies (BDCs), interval funds, tender-offer funds, non-traded funds, private funds and separately managed accounts can all provide private credit exposure. Publicly traded BDCs may offer daily market liquidity, but their share prices can trade above or below net asset value. Non-traded BDCs and other semi-liquid vehicles may offer periodic repurchase programs that are capped, discretionary or subject to deferral.
For investment advisors, vehicle selection affects client communications. A client invested through a semi-liquid structure should understand that redemption limits are often an intentional feature designed to protect remaining investors and preserve the manager’s ability to hold less liquid loans. However, those features can become pressure points for client relations and litigation if investors expect liquidity that the vehicle was never designed to provide.
Key risks of private credit
Disclosure and documentation are central adviser controls, and advisers should be able to explain terms such as:
- Liquidity risk: Underlying loans are not designed to be sold quickly, and fund-level redemption programs may be limited, suspended, deferred or prorated in accordance with governing documents.
- Valuation risk: Many private credit investments are Level 3 or otherwise hard-to-price assets. Reported net asset value can depend on internal models, third-party inputs, manager assumptions and board or valuation-designee oversight.
- Fee and incentive risk: Management and incentive fees may be affected by gross assets, net assets, income, capital gains or other metrics. Where fees are tied to adviser-determined values or noncash income, advisers should evaluate whether the arrangement creates conflicts.
- PIK income risk: Payment-in-kind interest can increase reported income before cash is received. That can support distributions in the short term, but economic realization depends on the borrower’s future ability to pay, refinance or otherwise satisfy the obligation.
- Borrower and sector risk: Private credit portfolios may concentrate in sponsor-backed middle-market companies, software, healthcare, services, specialty finance or other sectors. Sector stress can affect valuation, covenant compliance, amendments and recoveries.
- Manager dispersion: Private credit outcomes depend heavily on underwriting discipline, covenant quality, collateral analysis, restructuring capability, valuation governance and liquidity management.
For investment advisors, the client communication should not lead with yield alone.
Current market developments
Recent attention on private credit has focused on redemption pressure in semi-liquid vehicles, valuation questions involving hard-to-price loans, exposure to software and technology borrowers, the use of PIK income and allegations that fee structures may create conflicts when advisers value assets and are compensated based on those values.
Investment advisors should avoid presenting isolated redemption limits as automatic evidence of market distress. In many private credit funds, redemption limits are part of the structure. At the same time, advisors should not dismiss those events as immaterial. Redemption pressure can reveal whether clients understood liquidity terms—and whether the adviser’s recommendation and documentation were sufficiently clear.
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Due diligence questions for client discussions
- How is the portfolio valued, who performs the valuation and what independent checks exist for Level 3 or hard-to-price assets?
- Are management or incentive fees calculated on gross assets, net assets, accrued income, realized income, unrealized appreciation or PIK income?
- What portion of reported income is paid in cash versus accrued as PIK, and what happens if PIK income is not ultimately collected?
- What redemption rights exist, what caps apply and how are requests handled when repurchase demand exceeds available capacity?
- What conflicts exist in affiliated transactions, principal transactions, cross trades, valuation designee arrangements or adviser compensation?
- What sectors, borrowers, sponsors, vintages and loan structures drive the portfolio’s risk exposure?
- How does the recommendation fit the client’s liquidity needs, income objectives, risk tolerance, time horizon, tax profile and ability to withstand delayed exits?
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Relevant litigation and regulatory developments for investment advisors
Recent public matters do not mean every private credit allocation is unsuitable; they show where plaintiffs and regulators are focusing. Advisors discussing private credit should treat these themes as due diligence and disclosure prompts.
Matter Allegations Comments Delman v. Blue Owl Credit Advisors LLC Investor alleged the adviser breached fiduciary duties by inflating fund values to extract excessive fees; the complaint centered on the adviser’s role in valuing illiquid Level 3 assets while also earning fees tied to those valuations and highlighted PIK income and advisory fees. Add plain-English discussion of valuation conflicts, fee bases and whether income is cash or noncash. Blue Owl Technology Credit Advisors litigation Investor complaints reportedly challenged adviser fees tied to hard-to-price assets, manager-determined valuations and PIK income that may not be realized in cash. Flag that PIK income and adviser-determined marks can create litigation risk when disclosures, governance or economics are challenged. SEC matter involving Madison Capital Funding LLC SEC charged a credit fund adviser with negligence-based, anti-fraud violations and fiduciary duty breaches tied to originated loans sold to affiliated private funds at fair value without reassessing market conditions after COVID-19 disruption. Emphasize that valuation processes should respond to changing market conditions and principal-transaction conflicts. SEC v. A.G. Morgan Financial Advisors LLC and principals SEC alleged an RIA and principals fraudulently induced advisory clients to buy promissory notes in high-risk private equity funds while presenting them as conservative and safe, and alleged failures to disclose conflicts. Advisors should avoid oversimplified “safe income” language and document client suitability, product risk, conflicts and concentration. SEC Closed Loop Partners administrative proceeding SEC announced settled charges against an RIA for failing to disclose and obtain consent for conflicted client loan transactions, failing to deliver required audited financial statements to private fund investors on time, and compliance policy failures. Include governance, consent, financial reporting and conflict-disclosure considerations when discussing private fund or private credit-like structures.
WHY THIS MATTERS: Recent litigation and enforcement themes center on hard-to-price assets, adviser-determined marks, principal transactions, PIK income and fees tied to asset values or non-cash income.
Private credit can remain a compelling allocation for appropriate clients, particularly where the objective is long-term income and exposure to directly originated credit. For investment advisors, however, the client communication should not lead with yield alone. The strongest framing is that private credit may be useful when the client understands and can accept limited liquidity, valuation uncertainty, manager dispersion, fee complexity and the fiduciary and disclosure issues now surfacing in litigation and SEC enforcement activity.