Level 3 Asset Valuations and Excessive Fees Trigger 2026 Private Credit Litigation Wave
The structural opacity of the $2 trillion private credit market has sparked a major wave of corporate, shareholder, and derivative litigation in the first half of 2026. At the heart of these legal battles is the valuation of "Level 3" assets—illiquid corporate loans and debt instruments that do not trade on active public markets. Because BDC and private debt managers charge management and incentive fees based on these valuations, plaintiffs allege that managers are systematically inflating asset marks to extract windfall fees.
The Conflict of Interest: Manager as "Valuation Designee"
Under SEC rules, BDC boards of directors frequently designate the fund's external investment adviser as the "valuation designee." This mechanism has become a primary target for plaintiffs' attorneys, who argue it creates a structural conflict of interest.
This tension is illustrated in two landmark derivative lawsuits filed against Blue Owl Capital affiliates under Section 36(b) of the Investment Company Act of 1940 (which allows shareholders to sue over breaches of fiduciary duty regarding compensation):
- Ataii v. Blue Owl Technology Credit Advisors LLC (Filed June 5, 2026): Filed in the U.S. District Court for the District of Maryland on behalf of Blue Owl Technology Finance Corp. (OTF), this derivative lawsuit alleges that the adviser's conflicted valuations of the fund's technology loans resulted in improper and excessive fees. The complaint argues that by designating the adviser as the valuation designee, the board "essentially turned over to Defendant the ability to set its own fees," leading to hundreds of millions of dollars in inflated valuations.
- Delman v. Blue Owl Credit Advisors LLC (Filed April 28, 2026): Filed in the U.S. District Court for the District of Manhattan on behalf of Blue Owl Capital Corporation (OBDC), this suit alleges that the adviser systematically overstated asset values to boost fees, pointing to a persistent gap between OBDC's net asset value (NAV) and its publicly traded share price (which fell 22% over the past year).
The Delman complaint specifically highlights the controversial practice of charging fees on "pay-in-kind" (PIK) interest—non-cash interest that accrues to a loan's principal balance when a distressed or cash-poor borrower cannot pay in cash:
"The lawsuit highlights the firm's use of 'pay-in-kind' interest, which is non-cash income that accrues to loan balances rather than being paid in cash. The complaint alleges that the adviser collects fees on PIK income even when it may never be realized."
Broader Industry Contagion
The litigation wave is not isolated to Blue Owl. Several other major private credit managers have been hit with securities fraud class actions over their asset valuation practices and credit quality disclosures in early 2026:
- FS KKR Capital Corp. (FSK): A securities class action was filed in May 2026 in the Eastern District of Pennsylvania, targeting the manager over asset valuation markdowns and deteriorating credit quality in its loan portfolio.
- BlackRock TCP Capital Corp.: A class action was filed in February 2026, similarly centering on allegations of misleading or inflated valuations of its underlying private credit assets.
Structural and Insurance Implications
This wave of litigation represents a significant evolution in private credit risk. While regulators like the SEC and the Bank of England have voiced concerns about private market valuations, the courts are now serving as the primary battleground. These developments are expected to drive up Errors and Omissions (E&O) and Directors and Officers (D&O) insurance premiums for private debt managers, as plaintiffs challenge whether boards failed to exercise adequate oversight over their valuation designees.