May 21 2025

Proskauer: Three risks to monitor in private credit

Laura Purkess Global News, Top 3 Proskauer

Proskauer has identified three risks to monitor in private credit, including around conflicts and calculating values.

First, it warned of conflicts that can arise around deal sourcing arrangements.

As private credit institutionalises, banks and capital providers increasingly form partnerships that leverage their respective strengths, it said.

Banks often originate and service loans, while private credit firms provide funding — benefiting from favorable regulatory treatment and long-term capital.

“While these partnerships offer strategic advantages, they also pose potential regulatory challenges,” the firm warned.

“Private credit firms must ensure their fund disclosures consider these arrangements and carefully draft agreements in line with fiduciary obligations.”

Second, it said there is heightened regulatory scrutiny on valuation policies.

“Unlike traditional buyout funds — where portfolio company valuations are complex but typically controlled by a few owners — certain credit assets are widely held, including by BDCs and other investors subject to public reporting,” it said.

“Yet, despite broader ownership and increasing reliance on third-party valuation firms, these assets can be just as difficult to value as private equity investments.

“Firms may assign different values to the same credit investment based on their own policies, internal models and subjective evaluation of available data.

“While valuation discrepancies among firms are not itself problematic (and to be expected), this has sparked media scrutiny and regulatory attention.”

To reduce risk, it said firms should “ensure their valuation policies are well-documented and effectively applied, particularly in scenarios not initially anticipated”.

Finally, it said managing multi-strategy conflicts is another area to watch.

“Historically, private fund managers specialized in either credit or equity, simplifying conflict management. However, when a buyout firm launches a credit strategy — or a credit firm expands into equities — conflicts become more complex,” it said.

“Investing across a company’s capital structure can create misalignment between funds.

“Even when firms do not invest across multiple capital levels, conflicts may arise. For example, if a company seeking debt financing is also a potential buyout target, questions may emerge over which fund should receive investment priority.”

To mitigate these risks, it said that firms should “ensure clear compliance policies, conflict management frameworks, and independent oversight mechanisms”, while disclosures should “transparently outline how funds allocate opportunities and manage competing interests, particularly in times of distress”.