Key Takeaways
- Is the private credit liquidity premium finally being tested? As gates emerge and transparency gaps widen, the market is confronting whether liquidity has been mispriced rather than simply misunderstood.
- Surface-level underwriting is no longer enough. Risk is increasingly being uncovered in governance, cash flow integrity and collateral verification, where borrowers can appear to perform on paper until independently tested.
- The edge is independent, end-to-end insight. Firms that combine rigorous diligence, independent valuation and ongoing monitoring to test borrower and collateral integrity are better positioned to identify early stress signals and respond across the full credit lifecycle.
Is the shine of private credit wearing off, or is the asset class simply being tested for the first time at scale?
What had become a defining trend in global finance, offering investors attractive yields and borrowers flexible capital solutions, is now entering a different phase. Liquidity mismatch, valuation uncertainty and increasing pressure on borrower performance are moving from theoretical risks to practical challenges that threaten to disrupt a period of sustained tailwinds.
Recent high-profile lending situations, including alleged cases involving misstated receivables and overstated collateral, have reinforced a critical point. Even well-structured transactions can mask underlying weaknesses when transparency is limited and independent verification is lacking.
This raises a broader question: is the liquidity premium at risk of collapse? As widely reported, several large managers are now applying gates to their credit funds. In many respects, these mechanisms are functioning exactly as intended, preserving asset value and protecting remaining investors in periods of stress. The more important question may be whether investor expectations around liquidity have remained aligned with the underlying reality of the asset class.
What is becoming clear is that the market is not simply repricing risk. It is being forced to confront it more directly.
As these pressures build, the focus inevitably shifts from market dynamics to the underlying borrowers themselves.
Borrower and Collateral Diligence
In our work with investors and lenders, we are seeing a clear shift in focus. Attention is moving beyond yield and structure toward a more fundamental question: how well is the underlying risk actually understood?
That question begins with the borrower but increasingly extends beyond traditional financial analysis. Reported performance alone is no longer sufficient. Greater emphasis is being placed on the integrity of the information itself, how it is generated, how it is controlled and whether it can be independently validated. It is often at this level that gaps emerge. A borrower may appear to perform on paper, yet closer examination of governance, controls or cash movement can tell a different story.
A more robust diligence approach typically brings these elements together, incorporating both financial and operational perspectives:
- Governance and ownership transparency
- Management background and behavioral risk indicators
- Regulatory and sanctions exposure
- Validation of financial and cash flow information
- Treasury controls and incentive structures
Taken together, these factors help determine whether reported information can be relied upon and whether risks may exist outside of traditional credit metrics. At PKF O’Connor Davies, our diligence teams focus on building this broader picture, combining underwriting with independent verification and targeted testing designed to identify risks that may not be immediately visible.
Collateral, long viewed as a source of protection, is also being re-examined. Verification processes that may have been considered sufficient in a more benign environment are now being tested under more challenging conditions. Establishing true visibility over collateral often requires more than legal confirmation or registry checks. It requires understanding how assets are generated, how they are recorded and how they behave over time.
In practice, this often involves a combination of approaches:
- Counterparty and obligor confirmations
- Payment flow analysis and control account review
- Targeted analytical or forensic testing
Where direct verification is limited, triangulating these inputs becomes critical, particularly as collateral quality can deteriorate without clear visibility.
Valuation
In private credit, valuations are typically derived from models and assumptions rather than observable market transactions. While this approach may be appropriate in stable conditions, it can delay recognition of deterioration when markets tighten.
As a result, investors are placing greater emphasis on how and when valuations are constructed, challenged and validated. Aligning valuation with actual performance, particularly cash performance, is becoming essential to maintaining an accurate and timely view of risk. Even relatively small changes in assumptions can materially impact outcomes, particularly in less liquid or more complex positions.
In our experience, independent valuation is not simply about confirming a number. It is about testing the underlying drivers of that number and assessing whether it remains supportable as conditions evolve. At PKF O’Connor Davies, our valuation specialists work with clients to provide that independent perspective, particularly in situations where judgment and uncertainty are more pronounced.
Ongoing Monitoring
As market conditions become more complex, the distinction between reported performance and actual cash behavior is becoming increasingly important. Understanding how cash moves through a business, where it originates, how it is controlled and how it is ultimately applied, is often the clearest indicator of underlying health.
This requires a more granular and continuous level of analysis, often focused on:
- Cash flow generation versus reported earnings
- Payment waterfalls and debt service priority
- Treasury structures and account control
- Intercompany activity and potential leakage
Independent monitoring of these elements can provide early warning signals, often before issues become visible through traditional reporting or covenant breaches. At PKF O’Connor Davies, we support clients with ongoing monitoring and cash flow analysis, providing an independent lens on performance and helping to identify early indicators of stress or deterioration.
Even the most robust diligence and monitoring cannot prevent every issue. When problems do arise, the ability to respond quickly and with clarity becomes critical.
In our experience, warning signs are often subtle. Small inconsistencies in data, shifts in payment patterns or anomalies in reporting can signal deeper issues. As situations escalate, forensic analysis plays a central role in establishing what has happened, quantifying exposure and identifying paths to recovery.
Our diligence teams work alongside clients to trace cash flows, validate collateral and investigate discrepancies, providing the clarity and evidence needed to support decision-making, recovery efforts and, where necessary, legal proceedings.
Due diligence, in this context, is no longer a one-time exercise. It is the starting point for continuous oversight. Reassessment of borrower performance, validation of assumptions and ongoing review of liquidity positions are becoming integral to effective credit management. Increasingly, this requires a coordinated approach across diligence, valuation and forensic disciplines rather than siloed analysis.
Private credit is not losing relevance, but it is entering a more demanding phase – one in which discipline, transparency and independent insight will increasingly define outcomes.
Contact Us
At PKF O’Connor Davies, our experienced diligence, valuation and forensic teams advise clients across the full lifecycle of an investment, from pre-investment underwriting through ongoing monitoring to complex workout and recovery situations. By combining these capabilities, we provide independent insight into the performance, valuation and integrity of underlying credit exposures, helping clients navigate an increasingly complex and evolving market environment.
If you require services as a borrower or lender, please contact your client service team or:
Helen Rexwinkel
Partner
hrexwinkel@pkfod.com | 203.705.4143