How private credit loan values are calculated

The financial professional take on “The Lead” newsletter series is dedicated to help financial professionals stay informed about developments, and movements in private capital investing.

Bottom-line upfront

1. Loan valuation in private credit is a rigorous, multi-layered process involving upward of 20 data fields per loan, with dedicated internal teams and third-party specialists working independently to establish fair value.
2. Structural safeguards across the industry, including the separation of origination and valuation functions and third-party oversight used by more than three-quarters of business development companies (BDCs), are designed to reduce conflicts and improve mark accuracy.
3. Valuation consistency over time, not quarter-to-quarter precision, is the meaningful measure of manager quality, with the majority of loans held by more than one BDC marked within one point of one another.

Understanding how private credit loan values are established provides a more complete foundation for conversations about portfolio transparency, manager selection, and risk management in client allocations.

How direct lending loan values are calculated

We introduced this topic in the recent ”When valuations tell only part of the private credit story” post. By popular demand we're digging deeper into how experienced managers establish that number. Investors see the output, but don't always get a picture of the inputs. So, here's a quick lesson on loan valuations in a private credit portfolio.

What goes into a single loan valuation

The first thing to know is a single loan valuation can involve upward of 20 data fields. This includes financials, market comparables, outlook, management commentary, and more. Each one is capable of pushing fair value in either direction. Getting it right is as much art as science. And that's where the fun begins.

How valuation teams are structured to reduce conflicts

To eliminate the appearance of conflict, deal teams have moved away from setting marks. Instead, dedicated internal valuation teams have stepped in. Insulated from origination bias with no stake in the outcome, their incentive is to get it right.

Using third-party valuation firms provides additional oversight and methodology diversification. More than three-quarters of BDCs use these specialists, canvassing thousands of loans across the market. They identify the key value drivers and the impact these dynamics have on the loans. That kind of market intelligence only comes from deep experience and expertise.

Portfolio-level monitoring: from quarterly to monthly

At the portfolio level, the rigor only deepens. Skilled managers monitor every loan, not just a sample. They cover multiple factors from market changes and portfolio company activity to exits, repayments, draws, payment-in-kind (PIK) income, restructurings, watchlist changes, and estimated costs. And what was a quarterly exercise has increasingly become monthly. That's not a rubber stamp, that's a gauntlet.

When lenders arrive at different marks

When lenders arrive at different marks for the same loan, it isn't necessarily evidence of a broken process. It may result from updated financial statements or varied business assumptions.

When the media called out certain large software loans going on non-accrual, the disparity between past and current marks became an industry-wide indictment. As is often the case, these were outliers and a majority of loans held by more than one BDC are marked within one point of one another.

Marks are method, not myth

Marks are more method than myth. And they are tested, not over a quarter or two, but over many years and multiple cycles. Investors who stay with managers who have built valuations on a sound foundation with layers of checks and balances, can expect those marks to stand the test of time, though past performance in valuation accuracy is not a guarantee of future outcomes.

Private credit investments are illiquid. Advisors should discuss liquidity constraints and the long-term nature of these commitments with clients before recommending an allocation.