The private credit market is seeing an unprecedented explosion, crossing $2 trillion globally and poised to reach $4 trillion by the decade’s end. This rapid rise came at a price; a 5.8% default rate in private credit, according to Fitch Ratings in January 2026, represented the highest level in the history of the market. The default rate in the consumer sector has doubled over the past twelve months.
Challenges
Private credit has always been fraught with challenges, but the issue with defaults is a direct result of its very nature. Unlike bonds, which are easily traded in the marketplace, there is no mechanism by which private loans exist or are priced in the market. There is less regulatory oversight, and the parties involved have fewer reporting requirements. These dynamics combine to make it impossible to assess the real-world risk posed by a private loan obligation, obscuring the danger until it is too late – when legal proceedings have already begun.
In a case eerily similar to 2008, legal action has been initiated against credit rating agencies, for similar reasons. After the collapse of the housing bubble, many investors were able to bring successful litigation against rating agencies over the ratings they had assigned to mortgage-backed securities.
Lessons From Credit Rating Agency Litigation: An Economic Framework
In April 2012, my colleague Bin Zhou and I presented “Economic Considerations in Litigation Against the Credit Rating Agencies” at The Brattle Group, an analytical framework for assessing issues in litigation against rating agencies and how economic analysis could be used to understand the challenges they present. The problems we identified in that paper were simple ones: the company that receives the rating is the one responsible for paying for it, creating an incentive to inflate scores (“ratings inflation”). Investors rely on these ratings, believing they are objective evaluations of risk, and make decisions based on that information. In doing so, they become exposed to risks they would not have otherwise taken, as there is no accounting for the ratings inflation.
These observations led to some difficult questions about the role of credit rating agencies in litigation. Firstly, can investors be shown to have relied on the challenged ratings as a basis for investment decisions? Secondly, can causation be established, i.e., can it be shown that, absent the allegedly misleading rating, the investor would not have invested? Finally, how could the damages be estimated?
The 2017 Moody’s DOJ settlement amounted to $864 million and acknowledged the use of a “more lenient” internal framework when assigning ratings to mortgage-backed securities. Similar conflicts of interest and ratings inflation created the perfect storm for the 2008 crisis.
How Private Credit Recreates and Amplifies Those Same Dynamics
The parallels between the dynamics at play in the private credit market today and the rating agency issues of 2008 are impossible to ignore. Not only are they closely linked, but the private credit environment poses additional challenges that exacerbate the situation. With respect to rating agencies, there are currently many more small agencies competing to rate private securities, and the large agencies like Moody’s, S&P, and Fitch play a significantly smaller role than in the past. This development is demonstrably problematic: according to the International Monetary Fund, while the big three rating agencies only issued 1000 ratings of private securities in 2023, compared to 2000 in 2019, smaller firms rated approximately 7000.
Those smaller firms now face the same pressures to engage in ratings inflation that the larger firms did before the crisis. However, since they do not operate under the scrutiny of the public eye, and their reputation has less value than that of the ratings agencies with a long history of stability, they are even more inclined to participate in ratings inflation. The insurance industry showcases this issue as one of the biggest conflicts of interest in the private credit space today. With insurers holding around 35 percent of their assets in private credit in North America and life insurers holding close to 1/3 of their assets in private debt, with a total value of $5.6 trillion, there is an enormous amount of risk to be exposed.
When a downgraded rating requires higher reserves, insurers feel the need to shop around for the highest possible rating. In November 2025, UBS chairman Colm Kelleher referred to this practice as “rating agency arbitrage,” similar to the dynamics that led to the 2008 crisis. The Bank for International Settlements noted that smaller agencies could be inclined to “unduly lenient” ratings.
As private securities are not publicly traded, there is no mechanism by which market price discovery could challenge the accuracy of a rating. Four times per year, the market value of a private credit fund’s assets is disclosed, with the value discovered using internal methodology employed by the fund itself. If the rating does not accurately reflect the value of the portfolio, the discrepancy is hidden, with the dangers remaining unrealized until actual defaults occur.
Emerging Private Credit Securities Litigation Trends
Litigation in connection with private credit has been erupting this year. In early 2026, the most significant litigation shake-ups involved a series of group litigation against publicly traded Business Development Companies, or BDCs. These companies operate as investment funds, specializing in financing middle-market and private companies and acting as a significant source of capital in the private credit market. Investors brought litigation under securities laws, specifically Section 10(b) and Rule 10b-5, alleging that the defendants provided inaccurate valuations of their assets, concealed losses, and failed to disclose that the quality of their loans had significantly deteriorated. In one case, following the company’s announcement, the value of a share declined by 19% over the span of three months, down 23.4% for the year – a significant short-term drop, indicative of the dangers lurking beneath the surface.
Litigation targeting the credit rating agencies is not far behind. These cases are generally brought under Section 10(b) and Rule 10b-5. Whether an agency is liable under those provisions is a legal question. The economic questions are different: whether an agency followed its published methodology, whether that methodology captured the real risks in the portfolio, and whether an investor’s losses can be traced to the rating rather than to other market forces.
It is notable that the SEC’s 2026 enforcement priorities highlight private credit funds as a particular area of regulatory interest. The SEC is due to scrutinize the private credit funds’ disclosure of the valuation of their assets, expense practices, liquidity risk management practices, and whether their structures contain any conflicts of interest between different categories of investors. Some private equity funds use liquidity facilities to provide downside protection to certain investors while continuing to make distributions to others. How those structures interact with the new ERISA guidelines is a legal question, and it is widely expected to be an active area of litigation.
In recent months, ERISA has had a significant impact on private credit funds. The Department of Labor will be proposing a rule later this year that would allow a significantly larger allocation of a 401(k) plan’s assets to private credit, and it would utilize target date funds as a mechanism for doing so. ERISA-related litigation has been rampant in the first three months of 2026, with nearly 70 class-action lawsuits filed in just the first quarter of the year, compared to only 35 total in 2025. This development reflects the fact that private credit funds are becoming a standard feature in many retirements plans, frequently in the form of a default option. As these plans come under closer examination, whether their fiduciaries met their legal duties is a question for the courts. The economic questions are whether the value assigned to the assets was sound and whether the assessment of their liquidity was reasonable.
With respect to fund redemptions, disputes have erupted regarding the use of gates and other restrictions to slow down the distribution of assets to investors during periods of market stress. In the first three months of 2026, investors have attempted to redeem $20 billion from private credit funds, but the funds have been able to limit these redemptions by employing specialized gates. The result was a gap in outcomes between investors who exited the fund before the value fell and those who did not. Those who exited received more for their shares than the value that later remained available to those who stayed.
The use of gates is widely expected to generate further litigation. Whether the gates were applied in bad faith, or benefited some investors at the expense of others, is a legal question. The economic question is whether the value assigned to investor shares at the time of redemption reflected the actual value of those shares.
Expert Witness Capabilities: These Cases Require
Private credit securities litigation falls squarely in the realm of technical expertise, where one has to navigate from identifying a problem to ultimately presenting an economic damages theory. Event studies and market efficiency analyses represent fundamental pillars of BDC fraud class action litigation, with the expert witness playing a crucial role in isolating the impact on the stock price resulting from the alleged fraud or misrepresentation. These findings can then be used to establish class-certification economics.
Analysis of credit rating methodology plays a similarly important role in litigation targeting the rating agencies. One has to be able to identify whether a particular agency followed its published methodology when issuing a particular rating, whether it performed it correctly, and what alternate ratings would have been available. This requires extensive knowledge of the inner workings of these firms.
NAV and valuation analysis are central to both BDC fraud litigation and the disputes surrounding the fund redemptions. In the context of BDC fraud litigation, experts must determine whether the NAV employed followed generally accepted valuation principles and whether those principles were applied consistently or used as a tool to defer losses. Similarly, experts in the context of redemption disputes must review whether the valuation methodology was appropriate and whether it followed all applicable accounting standards.
Finally, modeling the damages is an essential part of any expert analysis, as the investor losses must be carefully parsed to sort out the portion of decline due to inflation and the effects of the fraud, or misrepresentation, from the portions due to other forces.
How My Background Addresses These Needs
The article I wrote with my colleague Bin Zhou in 2012 was explicitly aimed at real-world litigation, providing a theoretical basis for many of the issues that were ultimately litigated in the wake of the 2008 crisis. It is notable that many of the questions it posed are being raised again in connection with private credit. By examining the conflicts of interest, the economic assumptions about the reliability of the ratings, and the ability to demonstrate reliance and damages, it provides relevant context for many of the current issues. My commentary in the ABA journal in 2016, “Latest SEC Report on Rating Agencies Resurrects Questions Concerning Conflicts of Interest,” further develops the themes I identified in the 2012 work, applying my insights to the current environment as well.
In addition to the theoretical background, I have practical experience with many of these matters, having worked as an expert witness in a variety of securities-related litigation cases. Having conducted event studies, market efficiency analyses, market price impact assessments, and loss modeling as part of multi-billion-dollar cases, I am well-versed in the technical aspects of this type of expert services. As a result, I am capable of representing either side in the context of BDC fraud litigation, rating agency litigation, valuation disputes, and ERISA-related matters.
The Playbook is Being Rewritten
After the 2008 crisis, litigation against rating agencies moved forward, and the economic losses at issue could be measured. These lessons are now being applied to the private credit space, which involves much more complex instruments and exposes many more investors to these dangers, including ordinary Americans investing through their 401(k)s. For this reason, the parties to these disputes benefit from someone who understands both the practical and theoretical aspects of the issues.
I am offering my expertise, knowledge, and capabilities to help your team get the best results. I invite you to set up a free and private consultation to discuss how I can assist in your case.
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