Efforts by alternative asset managers to ramp up the frequency of pricing for private credit assets — possibly even adopting daily pricing — would be an improvement in transparency, but doesn’t resolve the sector’s inherent valuation issues, says Fitch Ratings.
In a new report, the rating agency says that some alt managers are exploring the idea of providing more frequent pricing for private credit positions, amid the growing retail investor market for ETFs and other alt funds that provide exposure to private credit.
While increased price reporting would be “a positive development,” Fitch said, it won’t “resolve the deeper valuation challenges” in the asset class.
The underlying issue is the fact that most private credit loans are valued without data from active markets for these assets, it noted.
“Although the appeal of daily pricing is understandable, the root of the challenge lies in the methodology used to determine fair value, and in the limited — and in some cases non-existent — trading in private credit assets, which hinders price discovery,” the report said.
Daily pricing doesn’t equal price discovery, it stressed — adding that, “without real market liquidity” the price discovery process “remains constrained”.
To more fundamentally improve transparency in private credit, the sector needs, “robust and standardized valuation methodologies, expanded borrower-level data, stress testing, and stronger governance around independent valuation agents,” it said.
To that end, efforts by the private credit industry to introduce standardized securities identifiers, along with more consistent documentation, “represent a meaningful step toward improving secondary-market liquidity,” Fitch said.
However, as private credit transactions continue to utilize “bespoke features such as equity kickers” this will inhibit the development of secondary market liquidity for these assets.
So, while the prospect of daily pricing is a step forward for transparency, the industry should remain, “clear-eyed about its limitations,” it said.