Valuation sits at the center of how private funds, investment companies, and BDCs operate. It lives in the net asset value (NAV), in the number investors transact on, the base for management and incentive fees, and the reference point for redemptions and marketed performance. Because of that position, valuation is an imperative operating assumption, and when it changes, the effects move quickly through the rest of the system.
Valuation doesn’t stay in valuation; it presents in how the product behaves. Let us call this dynamic the “valuation effect.”
When valuations are accurate, NAVs behave as expected, fees align with economics, liquidity functions as designed, and performance signals remain reliable. When they are not, the system does not fail quietly. The consequences surface in unexpected NAV movement, strained redemption mechanics, misalignment between value and fees, and heightened scrutiny from boards and regulators.
Why Private Credit Amplifies the Valuation Effect
Private credit places particular weight on valuation because it relies heavily on illiquid and bespoke assets, and often operates within structures that offer limited liquidity. In funds subject to the Investment Company Act of 1940 (“1940 Act”), private credit portfolios frequently consist of Level three assets, where valuation depends on judgment rather than observable market prices. Valuation therefore functions as a central operating input.
In 2025, private credit reached a meaningful scale, with S&P Global Market Intelligence estimating the global market at approximately $1.7T. At that size, valuation judgments no longer remain confined to individual portfolios. They interact directly with NAV, leverage, income distributions, and liquidity features, making the valuation effect more visible and more consequential across the structure.
Rule 2a-5 and Responsibility
For vehicles subject to Rule 2a-5, that regulation provides the governance framework for valuation. It requires 1940 Act funds to assess valuation risks, establish and test appropriate methodologies, oversee pricing services, and maintain supporting records.
Boards may delegate the day-to-day work of valuation to an investment adviser or internal team, but they remain responsible for the fair value determinations themselves. That responsibility exists because valuation directly shapes what investors experience. Approving valuation policies is not sufficient. Boards must understand where judgment is applied, how assumptions are calibrated, and how changes are identified and escalated. Also, they must oversee how valuation decisions actually play out through NAV behavior, liquidity outcomes, and performance.
Private credit managers of funds not subject to Rule 2a-5 remain responsible for valuation oversight, including separation between investment teams and valuation decisions, reassessment during credit events, and documentation of material judgments.
What Regulators Continue to Focus On
The SEC’s attention to valuation has been consistent. However, regulators are now acutely aware that private and illiquid assets are increasingly held in vehicles that calculate daily or periodic NAVs and offer periodic liquidity. This dynamic is amplified by structures such as interval funds and BDCs, with an increasing number now being sold to retail investors. In examinations, regulators rarely focus on whether a firm selected the “right” model in the abstract. Instead, they look for a valuation framework that holds together end-to-end, including:
- a clear rationale for methodology selection calibration of key assumptions as conditions evolve
- back-testing against realized exits or repayments
- active oversight of pricing services, and
- board reporting that enables meaningful oversight
This reflects the valuation effect. What matters most is whether the valuation framework remains effective over time, not whether a single valuation point looks precise.
Valuation and Liquidity are Inseparable
The valuation effect becomes most visible during periods of stress, particularly around liquidity. Redemption limits, tender offers, leverage tests, and asset coverage ratios all rely on valuation as an input. When valuation assumptions drift away from economic reality, liquidity pressure tends to emerge abruptly rather than gradually. That’s why valuation can be seen as the connective tissue linking portfolio construction, fee economics, liquidity terms, performance calculations, and investor communications. When that connective tissue weakens, strain emerges where capital moves and decisions are made.
Closing Perspective
As private credit scales, valuation remains a load-bearing element of the structure. When conditions change, the system stands or fails based on that work.
Valuation lives in the NAV. The question is whether the framework beneath it is built to carry the weight.
How ACA Supports Valuation Programs
ACA works with private credit managers to conduct compliance reviews of valuation programs that protect investors, meet regulatory scrutiny, and in the case of BDCs and interval funds, withstand board oversight. We help 1940 Act funds build frameworks that satisfy Rule 2a-5 with a focus on methodology discipline, calibration, and back-testing, pricing service oversight, and decision-ready board reporting. Our work clarifies roles, escalation paths, and governance expectations, delivering targeted remediation where frameworks fall short of SEC exam standards.
Ready to strengthen your valuation framework and meet regulatory expectations? Contact us to discuss how ACA can support your valuation program.