Feds asking questions of BlackRock private credit fund: Report

Citing “people familiar with the matter,” The Wall Street Journal on Friday reported that federal prosecutors are probing a BlackRock private-credit fund that surprised investors earlier this year when it wrote down its portfolio.

BlackRock spokesperson on Tuesday declined to comment when InvestmentNews asked about Journal’s report.

The Journal report is the latest in a series of ill winds that continue to buffer managers of private credit funds and nontraded business development companies, which make loans to private businesses.

Since the start of the decade, financial advisors have been selling private credit funds and nontraded BDCs to clients looking for higher-yielding products.

Last year, the private credit party slowed down dramatically, as investors started to pull money from those illiquid funds, nervous about the value of loans, many made to technology and software companies now under pressure from rising artificial intelligence firms.

Moody's Ratings in April revised its outlook on BDCs to negative from stable.

And last week, Robert A Stanger & Co. Inc. reported that the dramatic fall off in sales of private credit and loan funds, including nontraded business development companies, has reached a critical point.

In the first quarter of the year, Stanger reported that clients are redeeming or selling back their shares to nontraded BDC funds at a rate that outpaces new sales in the first three months of the year by $2 billion.

Now, federal prosecutors are looking at how BlackRock is creating valuation for one of its funds, according to the Journal.

“The Manhattan U.S. attorney’s office is investigating the valuation practices of BlackRock’s publicly traded TCP Capital fund,” according to the report.

“The fund’s poor performance has been a sore spot for BlackRock, though its roughly $350 million market value represents a negligible portion of the assets of the world’s largest investment firm,” according to the report. “In January, the fund disclosed a 19% decline in the net asset value of the investments it owns, writing down the value of a number of loans that its managers had marked at or near cost just a few months earlier.” 

“Shares of the fund have dropped 45% over the past year, and trade well below the stated net asset value—the managers’ estimate of what the portfolio is worth,” according to the Journal. “Because many private loans rarely or never change hands, marking their fair value is a subjective exercise.”

“Many managers use third-party valuation firms to come up with estimates, which are typically reported quarterly by private-credit funds that are marketed to individual investors,” according to the report. “Skepticism over those valuations began to bubble up last year, prompting investors in public funds like BlackRock’s to sell shares, and investors in so-called nontraded private-credit funds—a larger segment of the market—to ask managers for their money back en masse.”