Private credit has a problem with opacity.
(The Wall Street Journal, Jonathan Weil, March 17, 2026).
Investors are fleeing en masse from the $42 billion Cliffwater Corporate Lending fund due to high redemption requests, suspecting that the net asset value is inflated, compounded by extremely complex and non-transparent disclosures that make it difficult to understand the actual investments held.
The fund lists over 3,600 individual holdings, including direct loans to mid-sized companies and stakes in other private credit funds, as well as $6.9 billion in unfunded financing commitments across 1,700 items, with most assets classified as Level 3, meaning based on unobservable inputs and subjective valuations.
A striking example of opacity is the investment in Ares Commercial Finance, reported as in liquidation as of June 30, 2025, in one report, but then reported as still active and increasing in value in subsequent months without adequate explanations, further undermining investor confidence.
The fund is a labyrinth of black boxes.
“Imagine opening a black box and finding 5,000 more inside. Investors are fleeing the $42 billion Cliffwater Corporate Lending fund, one of the last of its kind to limit shareholder redemptions.”
The disclosures are impenetrable and voluminous.
“Disclosures from funds like this are often as impenetrable as they are voluminous. The most recent quarterly report from the Cliffwater fund listed over 3,600 individual holdings, including direct loans to mid-sized companies and stakes in other private credit funds.”
An uncorrected error undermines credibility.
“In the report as of September 30, 2025, Cliffwater indicated that the Ares fund would liquidate on June 30, 2025, but three months later the investment was still active with increasing value, without any explanation. Cliffwater admitted the date was an uncorrected error related to the conversion to an evergreen fund.”
Valuations based on others’ faith.
“71% of investments are classified as Level 3, with significant and unobservable inputs. For a further 28% in other private vehicles, Cliffwater relies on net asset values provided by external managers, without its own estimates.”
The structure promises liquidity but hides risks.
“The structural problem with funds like this is that they promise investors short-term liquidity while holding long-term, illiquid assets with opaque valuations. Shareholders who remain in the fund bear the risk that one day it will have to sell assets at unfavorable prices to fund redemptions.”
Connections in private credit become complicated for banks.
(The Wall Street Journal, Ben Glickman, March 17, 2026).
A legal dispute between Western Alliance and Jefferies Financial reveals how traditional banks have financed the private credit boom through special purpose vehicles, exposing themselves to significant risks when borrowers default, as in the bankruptcy of First Brands Group.
U.S. banks have increased commitments in the private credit sector to nearly $300 billion, often through direct loans to funds or specific vehicles, but the opacity of these exposures has generated nervousness among investors, worsened by the war in the Middle East and economic outlooks.
Shares of Western Alliance and Jefferies plunged 16% and 17% respectively after the lawsuit, highlighting how opaque connections with private credit can turn into concrete losses for banks and undermine confidence in the banking sector.
Western Alliance accuses Jefferies of not repaying debt.
“Western Alliance filed a lawsuit for breach of contract claiming that a Jefferies subsidiary failed to repay part of a loan linked to the failed First Brands Group. The bank expects to write down $126.4 million on an original $337 million loan.”
Jefferies rejects the accusations as absurd.
“Jefferies believes the lawsuit is baseless and that it has no obligation to repay the loan. In a public letter, executives called the claim that Jefferies could not repay its debt false and absurd.”
Banks have accumulated massive exposures in private credit.
“Banks have poured increasing amounts of money into the sector in recent years, and analysts estimate that total exposure to private credit reached nearly $300 billion last year.”
The special purpose vehicle structure creates complex litigation.
“At the center of the dispute between Western Alliance and Jefferies is a common structure: a loan to a special purpose vehicle created by Jefferies to finance First Brands, which then purchased the expected receivables of the auto parts retailer through factoring.”
The opacity of exposures scares investors.
“Concerns stem from the fact that this is a true black box. Investors have become nervous about banks’ connections to private credit this year, while bank stocks face heavy selling.”
(Excerpt from the newsletter by Giuseppe Liturri)
