Private Credit News Weekly Issue #99: DOJ Knocks on TCPC. The Marks Are Breaking.
Federal prosecutors are now asking BlackRock how it valued its loans. FSK needed $300 million. Apollo wants out of MFIC. The cycle has arrived.
Six months ago the private credit conversation was about which managers would win the secular flows. This week it is about which managers will survive the cycle.
That is a different conversation, and the speed of the shift is the part worth pausing on.
In a single week the industry got a DOJ valuation probe, a $1.4 billion restructuring that wiped sponsor equity at a Blackstone and KKR portfolio company, a $300 million capital injection into FSK, a reported sale process at Apollo’s public BDC, the first quarter in product history where non-traded BDC redemptions exceeded inflows, a Franklin Templeton CEO admitting on live television that private credit is less liquid than people think while simultaneously pitching it for 401(k) plans, and a JPMorgan secondary trading volume update that signals the slow arrival of price transparency the industry has resisted for a decade.
That is not a coincidence of news cycles. That is one story told from six different angles.
The story is that the marks underpinning the asset class are moving, and as they move, every layer of structure built on top of them is being repriced. Public BDCs trade at discounts because the market does not trust the marks. Non-traded BDCs face redemption gates because retail investors do not trust the marks. Sponsors are losing equity in restructurings that confirm the marks were optimistic for too long. The DOJ is now asking whether the optimism was negligent or something worse.
Here is what each piece tells us.
SDNY Opens the Door on TCPC
SDNY is asking questions about valuations at BlackRock TCP Capital Corp. According to Bloomberg, prosecutors in the Manhattan US Attorney’s office have been seeking information about the BDC for months and have questioned executives.
Jay Clayton, who runs the office, has been telegraphing this exact line of inquiry since November. He said publicly that financial regulators and the department were looking at how firms value private assets. He reiterated the point this week at the MFA conference. If people are mismarking in order to generate fees, that has always been a no-no. Quote unquote.
TCPC is the natural first test case. In late January the fund filed an off-cycle disclosure warning of a 19% asset writedown. The stock dropped 13% the following day, the worst single-day move since March 2020. The official Q4 NAV came in at $7.07 per share, down from $8.71 at the end of the prior quarter. Class actions followed almost immediately. The share price is down 24% year to date.
Off-cycle BDC disclosures of that magnitude do not happen in a market where the marks are working. They happen when the gap between carrying value and reality has grown too wide to carry for another sixty days into the regularly scheduled quarterly release.
The DOJ question is not whether the new mark is right. The question is what the prior mark was based on, who knew it was stale, and whether fees were collected against a number the manager had reason to believe was no longer defensible. That is a hard case to bring and an even harder one to defend, which is why every BDC general counsel in the country is reading the TCPC docket this week.
One detail worth flagging. Since BlackRock’s acquisition of HPS last year, HPS executives have moved into the TCPC operating structure and now hold three of seven seats on the investment committee. BlackRock is restructuring the management of a fund that is restructuring its book while the government investigates how the book was marked in the first place. That is the order of operations, and it is also a tell on what BlackRock found when HPS got under the hood.
Affordable Care and the Recovery Math
The Affordable Care restructuring offers an empirical anchor for what actual recovery economics look like once a mark finally clears to reality.
Blackstone and KKR are taking the keys to the dental services platform in a deal that cuts the $1.4 billion private credit loan by roughly 70%. Lenders receive a pro rata share of a $225 million first-lien second-out term loan, $200 million in PIK notes, and 100% of the pro forma equity, with an opportunity to participate in a $75 million new money facility. Everything below the senior debt in the waterfall, including sponsor equity and preferreds, gets fully wiped.
Harvest Partners and Berkshire Partners bought into the platform in 2021 at a $2.7 billion valuation. That equity is now zero.
BCRED had Affordable Care marked at 69.8 cents on the dollar at the end of March, per their April filing. The restructuring confirms the March mark was directionally correct. What the filings do not tell you, and what no public disclosure will ever tell you, is how long that loan sat in the high 80s or low 90s before reality forced the manager to write it down.
Blackstone first marked the credit down eighteen months ago. The path from initial deterioration to final restructuring took a year and a half. During that period investors in funds holding the credit were entering and exiting at NAVs informed by carrying values that subsequent events have demonstrated were optimistic. That is the structural problem the DOJ is examining at TCPC. It is not unique to TCPC.
FSK and the Cost of Defense
FS KKR’s $300 million capital action on Monday is the most explicit capitulation the industry has produced this cycle.
KKR is investing $150 million in preferred equity at a 5% cash or 7% PIK dividend, convertible at $18.83 per share if the stock rebounds to that level. A second $150 million will fund a tender offer at $11 per share. The board authorized a $300 million share repurchase program running for roughly a year. KKR has agreed to waive its portion of the subordinated income incentive fee for four quarters.
This is a coordinated package designed to defend a fund the market has clearly stopped trusting on its own merits.
The Q1 numbers explain why the package was necessary. NAV declined 9.9% to $18.83. Non-accruals rose to 4.2% of fair value from 3.4%. The dividend was cut from 48 cents to 42 cents. Medallia, the software platform Thoma Bravo has signaled it will likely hand to lenders, is no longer paying interest and got marked to 54 cents.
Pietrzak disclosed on the call that Medallia, Cubic, and Affordable Care together drove roughly 33% of the NAV decline in a single quarter, with ATX and Production Resource Group accounting for another 15%. Five credits, half the damage.
That is not a diversified loss profile. That is concentration showing up in the marks at the same moment that the redemption window is open. Every credit committee in the country is reading the FSK Q1 deck right now and asking what else in the book looks like Medallia. The honest answer at most shops is uncomfortable.
Apollo Picks Sale Over Defense
The Wall Street Journal reported on Monday that Apollo has been in talks to sell MidCap Financial Investment Corp., its publicly listed BDC, in a transaction Apollo values at roughly $3 billion.
MFIC reported a $61 million Q1 loss the prior week. Defaults rose to 5.3% from 3.9% in December. The stock trades at roughly 85% of NAV. The fund has effectively stopped new lending and is using loan repayments to fund share buybacks and debt paydown. The likely buyer is another BDC paying in stock, because no rational buyer pays full NAV in cash for a portfolio with that default trajectory.
The strategic read matters more than the transaction. Apollo is one of the most disciplined operators in this space and runs the playbook on managing public credit vehicles better than almost anyone. The decision to sell MFIC rather than defend it is a statement that the math of operating a public BDC at a persistent discount to NAV no longer works for the manager.
It echoes the January transaction in which Apollo’s REIT sold $9 billion of commercial mortgages to Athene, leaving the public vehicle with $466 million of net equity. The pattern is the same. The insurance balance sheet absorbs the assets the public market will no longer support at acceptable cost of capital. The public vehicle gets sold, wound down, or hollowed out.
When Apollo decides a public credit vehicle is not worth defending, every other manager running a similar structure should be running the same analysis.
The Software Concentration Problem
The thread running through every troubled credit this cycle is software, and it deserves its own section because the analytical framing matters.
Software was the favored sector of private credit for a decade. Sticky recurring revenue, high gross margins, sponsor-backed, asset-light, and seemingly recession-proof. The lending was priced accordingly. Software and services make up about 16% of FSK’s book. Comparable concentrations exist across most large BDC portfolios.
The story this cycle is not that software credits default at higher rates than other sectors. The story is that AI is changing the unit economics of software businesses faster than the underwriting assumed. Medallia is the canonical example. A platform that was financed against a stable SaaS thesis is now being handed to lenders because the sponsor does not see a path to repaying the debt.
The question every credit committee should be asking is not whether Medallia is unique. It is which other software credits in the book share the same vulnerability profile. Recurring revenue exposed to AI disruption, high financial leverage, sponsor unwilling to add more equity, and a carrying value that has not yet moved. That combination defines the population of credits that are statistically likely to follow Medallia into restructuring over the next eighteen months.
The TCPC DOJ probe is the legal version of this question. The Affordable Care restructuring is the empirical version. They are the same question.
The Gate Is the Product
The Stanger data on non-traded BDC flows quantifies what the FSK and MFIC stories show qualitatively.
Non-listed BDCs paid back about $7 billion in Q1 against roughly $5 billion in inflows, the first quarter in product history where redemptions exceeded gross fundraising. Total redemption requests topped $15 billion, which means the 5% quarterly gates that most funds operate under were the binding constraint rather than investor demand. The Stanger NL BDC Total Return Index posted its first negative quarter since Q2 2022.
The entire architecture of the non-traded BDC was a bet that retail capital would not all try to leave at the same moment. It is now demonstrably the case that retail capital does, in fact, all try to leave at the same moment when concerns about credit quality and AI disruption coincide with visible markdowns at peer funds.
The gate is the product now, not the liquidity promise.
The 401(k) Pivot
Jenny Johnson, the Franklin Templeton CEO, said the quiet part on Bloomberg this week. It drives her nuts when she hears people acting like private credit is more liquid than they think it is, because it’s not. She said this while making the case for putting private credit and private equity into 401(k) plans on the theory that retirement accounts are the right place for illiquid assets.
Both statements may be technically defensible. The juxtaposition is what matters.
The industry is pivoting from institutional retail channels under acute redemption pressure toward retirement channels with structurally longer lockups. The Trump administration proposal to give 401(k) plan sponsors legal protection for offering private investments is the policy vehicle. The Franklin Templeton case is the marketing vehicle. The non-traded BDC redemption data is the reason the pivot is happening now.
The pivot is not accidental. It is what an industry does when one source of retail capital becomes unreliable and another is sitting in front of it. Worth watching closely.
JPMorgan and the Arrival of Price Transparency
JPMorgan’s secondary trading volume is the structural development that ties everything together.
The bank has traded roughly $2 billion of private credit loans this year, more than in all prior years combined, across about twenty loans, with most transactions clearing above 90 cents. The number remains small relative to broadly syndicated loan secondary volume, where JPM facilitates about $1 billion a day. The trajectory is the point.
Funds need liquidity to meet redemptions. Liquidity requires a buyer. A buyer requires a price. A price requires a mark that clears.
The managers who have resisted secondary trading for a decade did so explicitly because trading forces mark discipline that disrupts the value proposition of the asset class. That mark discipline is now arriving whether the managers wanted it or not, driven by the redemption cycle they did not anticipate.
Sanjay Jhamna’s line that the current period of stress will accelerate structural change is correct. The specific change is that the marks become observable. Once the marks become observable, the dispersion across managers becomes observable. Once dispersion becomes observable, the LP conversation about manager selection changes from a relationship exercise to an empirical one.
That is the entire game, and it is starting to play out in the trade prints.
What to Watch
Q1 earnings season is winding down. The remaining reporters and the public BDC peer set are where the next leg of this story plays out.
Watch for software concentration disclosures and non-accrual additions at the names that have not yet reported. The market is now pricing these as binary. A clean print is rewarded. A miss on either credit quality or NAV trajectory is punished sharply.
Watch the non-traded BDC redemption gates in Q2. If gates were hit broadly in Q1, the structural test is whether Q2 sees a repeat. A second consecutive quarter of breached gates changes the regulatory conversation and likely accelerates the 401(k) pivot.
Watch for additional off-cycle disclosures. TCPC set the precedent in January. Any peer that files a similar disclosure between earnings releases is communicating that something in the book has broken badly enough to require immediate disclosure. The market will treat those filings as informative.
Watch the DOJ docket. The TCPC probe is the first inquiry of this kind we know about. It will not be the last. Every BDC with stale marks, recent off-cycle disclosures, or class action exposure is now sitting in a different regulatory risk bucket than it was a month ago.
The foundation underneath the asset class was the marks. The foundation is cracking. Everything built on top of it is now in motion.