BlackRock, the world's largest asset manager, has come under intensive investigation by U.S. federal prosecutors over allegations it inflated the value of private credit fund assets. As regulators step up pressure on the private credit industry to demand transparency across the board, some say the ripple effects from a market shake-up could spill over into the broader global financial market.
Aggregating reports from major outlets including the Financial Times (FT) and Bloomberg on the 16th, the U.S. Attorney's Office for the Southern District of New York has, over the past several months, obtained materials related to the valuation method for loans in "BlackRock TCP Capital" and is now investigating key executives.
Private credit refers to an alternative finance market in which nonbank financial institutions such as funds or asset managers provide funding to corporations in place of traditional banks subject to strict prudential regulation. The BlackRock TCP Capital fund is a business development company (BDC) that lends to promising mid-sized corporations and generates revenue. It is a type of loan product, but it is currently listed on the New York Stock Exchange and can be traded like a stock.
The investigation is focused on whether BlackRock deliberately marked up the value of distressed loan assets to maximize fund fee income. In January this year, the fund abruptly disclosed that a corporation it had invested in, including an e-commerce brand aggregator, had deteriorated, and projected its net worth would plunge 19% from the previous quarter. Immediately after the disclosure, the share price tumbled 13% in a single day, delivering a major shock to the market. Investors who suffered heavy losses filed a string of class-action lawsuits, saying the manager failed to assess loan asset values transparently and provided false information.
The U.S. Attorney's Office for the Southern District of New York, which is handling the case, is led by Jay Clayton, who served as Chairperson of the Securities and Exchange Commission (SEC) during the first Donald Trump administration. Clayton is regarded as one of Wall Street's "grim reapers" who have consistently pointed out vulnerabilities in private credit asset valuation. At a recent alternative investment industry conference, Clayton also signaled a tough stance on unfair practices, Bloomberg reported, noting, "Manipulating value to collect fees has always been prohibited."
The financial sector is watching to see whether the probe will serve as a starting gun for a sweeping review of the private credit market, which has swelled to $1.8 trillion. Private credit has long served as a key funding lifeline for corporations that could not clear banks' lending thresholds. But it has faced criticism for far lower disclosure standards than conventional bank loans and for leaving ample room to subjectively set asset values. Some have also warned that if a chain of defaults among indebted corporations occurs, hidden risks could erupt all at once and act as a detonator threatening the broader financial system.