The private credit market has grown rapidly, offering investors higher yields and portfolio diversification, but it carries significant structural vulnerabilities. For dispute resolution professionals, understanding these risks is essential, as they often underpin investor claims and regulatory scrutiny.

Opacity and disclosure gaps are the primary concern. Unlike public markets, private loans often lack publicly available information on borrower financials, loan covenants, or amendments. Limited transparency increases the likelihood of investor disputes over misrepresentation, insufficient disclosure, or failure to monitor portfolio risks. Regulatory attempts to improve disclosure have faced pushback, highlighting the ongoing oversight gap.

Valuation challenges compound the risk. Without reliable data, fund managers may assign inconsistent or inflated valuations to underlying loans. Discrepancies in net asset values (NAVs) can mislead investors and trigger litigation over performance reporting, fee calculations, or fiduciary breaches. Misvaluations are particularly sensitive when funds include defaulted or distressed loans.

Illiquidity creates further exposure. Many private credit funds are closed-ended with limited secondary markets, making timely asset disposal difficult. Forced sales during market stress can magnify losses and lead to claims that managers failed to act prudently.

Complex structures, such as Payment-in-Kind (PIK) loans, add another layer of risk. While these instruments provide flexibility to borrowers, they increase debt burdens and complicate repayment timelines. Mismanagement or inadequate disclosure of such arrangements may form the basis of investor claims.

Finally, because private credit lending is benchmarked against established lending standards, managerial decisions are subject to close scrutiny. This contrasts with traditional equity investments, increasing the potential for negligence or breach-of-duty claims.

In summary, the intersection of opacity, illiquidity, valuation uncertainty, and complex loan structures heightens litigation risk in private credit. Investors, fund managers, and advisers must carefully document processes, monitor portfolios, and ensure clear disclosure. For dispute resolution practitioners, awareness of these risk factors is crucial for anticipating claims and assessing liability exposure.