A fund manager buys a loan for $40 million. Eighteen months later the borrower has doubled its revenue, no new round has priced, and nothing has traded. The December mark is due in eight weeks. The manager writes down a number. That number is a judgment — and on September 28, 2026, the SEC staff published a detailed account of how that judgment gets tested.
The example is not hypothetical in form. It is the shape of every private credit valuation: an entry price, a borrower that has changed, a market that has moved, and no transaction to settle the argument. The staff statement from Chief Accountant Kurt Hohl and Division Director Brian Daly reads like a pre-audit checklist for anyone who marks illiquid positions, and its timing was pointed — it landed two days before the September quarter closed, with the year-end audit cycle directly behind it. The statement has no legal force; the authors say so in their first footnote. But the accounting standard it cites, ASC 820, already binds every entity measuring private assets at fair value under U.S. GAAP. When the Chief Accountant's office publishes a list of the places it sees significant judgment, that list has a way of becoming audit procedures in January.
The first judgment is calibration. When a valuation technique relies on unobservable inputs, it has to be calibrated so that at initial recognition it produces the transaction price. The entry price is the anchor. Take the $40 million example: an $8 million investment for 20 percent implies a revenue multiple of 8.0 times on $5 million of annual recurring revenue. Eighteen months on, revenue has doubled to $10 million and the public comparable set has compressed to 9.0 times. A calibrated mark does not simply apply 9.0 times to $10 million; it carries forward the discount the entry price implied — 9.0 times a 0.73 calibration factor, roughly 6.6 times — because the entry price told the market something about this specific company's risk that the public set does not. Skip that step and the mark drifts upward on every good quarter, compounding optimism into the NAV.
The second judgment is the NAV shortcut. Funds holding interests in other private funds often rely on the underlying manager's reported NAV as a practical expedient permitted under U.S. GAAP. The staff's message is that the expedient is optional, applies investment by investment, and is not a safe harbor. A fund using it should consider all reasonably available information — including relevant secondary-market data — and document the basis for using it. The secondary market now gives that test teeth: volume grew from about $156 billion in 2024 to about $220 billion in 2025, a 42 percent rise. When a fund interest trades at a discount in that market, the NAV being used as an expedient is, at best, unconfirmed. The staff also notes the scale of what rides on the shortcut: at year-end 2025, 21 percent of interval fund assets and 42 percent of tender offer fund assets were held in private funds not assigned a level in the fair value hierarchy — valued, in practice, on someone else's number.
The third judgment is the quietest and the most consequential for reported returns: payment-in-kind interest. PIK interest is income paid in more debt rather than cash, and it has become a material share of what private credit funds report. Across 74 business development companies, PIK interest was 6.09 percent of investment income in the first half of 2026, against 6.28 percent a year earlier — and 4.55 percent against 4.18 percent at the 33 non-traded ones. The SEC staff's statement calls for greater scrutiny of PIK and non-accrual disclosures: what triggers non-accrual, when accrual stops, and how uncollected interest is handled. The reason is plain. A fund can report rising income while its borrowers pay in promises, and a NAV built on PIK accruals is a NAV built on the assumption that the promises will eventually convert to cash. When they do not, the correction arrives all at once.
The correction, when it comes, shows up in the default numbers. Fitch Ratings reported that the actual default rate in its U.S. Privately Monitored Ratings portfolio rose to 9.2 percent in 2025, up from 8.1 percent in 2024, and its twelve-month default rate reached a record 6.0 percent in April 2026, up from 5.7 percent in March and 5.8 percent a year earlier. The business development companies felt it first in their marks: 125 BDCs booked $7.00 billion of net realized and unrealized losses in the six months to June 30, 2026 — 65.6 percent of their $10.67 billion of net investment income — against $1.64 billion in the first half of 2025 and $0.56 billion in 2024. At Blackstone's Private Credit Fund, $1.95 billion of losses nearly wiped out $2.00 billion of net investment income. Non-accruals at six large non-traded BDCs ran from 0.1 percent of cost at Golub's fund to 2.2 percent at Blackstone's, up from 0.6 percent at the end of 2025. The Federal Reserve, in May 2026, still described private credit defaults as remaining at relatively low levels — and the Financial Stability Board, in the same month, warned that the sector at its current size had not been tested through a severe or prolonged downturn. Both can be true. A market can be performing and fragile at the same time.
The structure of the market explains why the judgments matter more now than they did five years ago. Direct lending grew from just 13 percent of all private credit in 2010 to 56 percent by mid-2025, and private debt funds supplied 77 percent of leveraged buyout debt financing globally in 2024, the highest share since 2015. The five largest managers — Apollo, Blackstone, Ares, KKR, and Carlyle — grew their combined credit assets under management by 174 percent between 2020 and 2025, from $750 billion to over $2 trillion, and S&P Global projects their combined assets will top $3.3 trillion by 2029. The failures that sharpened the scrutiny in 2026 — First Brands and Tricolor — were cited by the European Central Bank as events that intensified questions about leverage, underwriting standards, and opacity, with some cases also involving allegations of fraud. When the biggest managers hold the biggest books and the books are marked by judgment, the judgment itself becomes systemic.
There is a defense of the current system, and it is not frivolous. The defenders argue that a loan's value is the cash it will return over its life, not the price a distressed secondary buyer would pay for it today; that marking to a thin secondary market imports volatility that has nothing to do with credit quality; and that the smooth returns private credit reports are not a fiction but a faithful picture of hold-to-maturity lending. A fund that marks its loans down every time public spreads widen would look like a bond fund, and investors did not hire it to be a bond fund.
The defense holds until the moment an investor needs to transact at the NAV — to enter, to exit, or to borrow against it. At that moment the mark stops being a philosophy and becomes a price, and a price needs evidence: a calibrated model, a tested expedient, and income that is cash rather than promises. The firms that can supply that evidence — independent opinions, loan-level benchmarks, audit-ready documentation — are becoming the market's referees. The loan that nobody has traded will still need a number. The difference now is that the number has to survive being checked.
Sources: SEC, Statement on Fair Value Measurement and Disclosure Considerations for Private Assets (September 28, 2026), https://www.sec.gov/newsroom/speeches-statements/hohl-daley-statement-fair-value-measurement-disclosure-considerations-private-assets-092806; Simpson Thacher, “SEC Joint Statement on Valuation of Private Assets” (October 2, 2026), https://www.stblaw.com/about-us/publications/view/2026/10/02/sec-joint-statement-on-valuation-of-private-assets; “SEC Staff on Private Asset Fair Value: Calibration, NAV and Your Year-End Marks,” https://www.409.ai/articles/sec-staff-statement-private-asset-fair-value-calibration-nav; Crowdfunded Wealth, “What Is Private Credit? The 2026 Crisis Test in SEC Filings” (BDC census of SEC filings: PIK shares, non-accruals, $7.00B H1 2026 losses), https://www.crowdfundedwealth.com/articles/what-is-private-credit-2026; Fitch Ratings U.S. Privately Monitored Ratings default rate (9.2% in 2025, up from 8.1% in 2024) and twelve-month default rate (6.0% in April 2026), as reported at https://private-equity-bros.beehiiv.com/p/private-credit-stress-signals-in-a-3-trillion-market and https://www.creditandcollectionnews.com/credit-defaults-hit-record-6-as-private-lending-market-faces-stress-from-higher-rates/; Financial Stability Board, Report on Vulnerabilities in Private Credit (May 6, 2026), https://www.fsb.org/2026/05/report-on-vulnerabilities-in-private-credit/; Federal Reserve, Financial Stability Report, May 2026, https://www.federalreserve.gov/publications/2026-may-financial-stability-report-funding-risks.htm; S&P Global figures on direct lending share and LBO financing, as reported at https://www.arcesium.com/blog/behind-the-private-credit-surge.