US Private Credit Faces NAV Crisis on $31.6 Billion Fund

A contagion of redemption freezes in the US private credit market is forcing a crisis of confidence over asset valuations, with funds like the $31.6 billion Cliffwater Corporate Lending Fund caught in a chain reaction. The core issue is an accounting rule that lets funds value their stakes in other illiquid funds at an official Net Asset Value (NAV), even when those funds have shut the door on withdrawals.

"To date, Cliffwater has not adjusted the NAV for non-traded BDCs that have not met redemption requests," Cliffwater Chief Investment Officer Blake Nesbitt said in an interview, confirming the fund's adherence to the current accounting practice.

The conflict is stark: Blue Owl Capital recently limited redemptions from one of its funds to less than a quarter of requested amounts, while Ares Strategic Income Fund capped withdrawals at 5% of shares against requests for over 11%. Despite this, Cliffwater continues to carry its holdings in these funds—worth over $250 million combined—at the official NAVs provided by the managers.

This valuation gap between official NAV and actual realizable cash value threatens to accelerate investor panic. If investors believe the reported value of their holdings is fiction, the incentive is to redeem immediately, potentially turning the current redemption wave into an industry-wide stampede and forcing a fire sale of assets.

The NAV Loophole

At the heart of the crisis is an exception in accounting standards. Typically, funds must measure holdings at "fair value"—the price willing market participants would transact at. However, a provision allows investors in private funds to simply use the official NAV reported by the underlying fund manager. This was intended as a practical shortcut for investors who lack the information to calculate fair value independently.

The problem arises when a fund's NAV is clearly detached from its market reality. When a fund like Blue Owl's OCIC faces redemption requests equal to 21.9% of its assets and then severely gates withdrawals, its official NAV no longer reflects the price at which a willing seller could find a buyer. Critics argue the rule's language—that a fund manager "should consider" adjusting a flawed NAV—lacks teeth, as merely "considering" is the full extent of the obligation.

This gray area has been exploited in other ways. Some funds have purchased shares of private equity funds on secondary markets at a steep discount and then immediately marked the position up to the official NAV, booking paper gains of over 1,000% in a single day.

Cliffwater's Chain Reaction

The Cliffwater Corporate Lending Fund is a prime example of this valuation dilemma. As of the end of last year, 28% of its $31.6 billion portfolio was allocated to other private investment vehicles, with valuations dependent on the NAVs provided by their managers.

Its holdings included approximately 16.2 million shares in Blue Owl's OCIC, carried at a book value of $151.2 million, and about 3.8 million shares in Ares Strategic Income Fund, valued at $1.049 billion. Even as both underlying funds restricted redemptions due to overwhelming investor exit requests, Cliffwater continued to value these positions based on the official NAVs.

Nesbitt noted that Cliffwater had not made additional purchases in either fund this year. The signal from these redemption gates is significant: if some holdings have a NAV that is clearly inconsistent with market reality, it casts doubt on the reliability of similar holdings across the portfolio, further eroding investor trust.

This article is for informational purposes only and does not constitute investment advice.