The Evolution of Private Credit Markets in the U.S. and Europe: Part 2 of 3

Key Takeways

• Global fair value frameworks (ASC 820 and IFRS 13) strengthened consistency and disclosure expectations, though important differences remain.
• Fund structures and liquidity terms are raising expectations around valuation cadence, documentation and governance discipline.
• Regulatory scrutiny of valuation process integrity has increased across the U.S. and Europe, with focus on governance, conflicts and fee sensitivity.
• For U.S. acquirers of UK/EU private credit managers, valuation readiness is a core integration priority, not a back-office consideration.

Setting the Standard: Regulated Frameworks and Fair Value Discipline

To meet expectations around transparency and operational discipline, private fund managers in the U.S. and Europe have increasingly aligned valuation governance and reporting practices with long-standing valuation frameworks developed for regulated funds.

In the U.S., the SEC’s Investment Company Act of 1940 (1940 Act) established governance, reporting and valuation standards for 1940 Act-regulated funds. More recently, SEC Rule 2a-5 formalized expectations around valuation oversight, documented methodologies, testing and monitoring, and board accountability. In Europe, the Undertakings for Collective Investment in Transferable Securities (UCITS) directive advanced harmonization for open-ended regulated funds, contributing to common expectations around fund oversight, reporting cadence and operational controls.

Although these regimes were designed for regulated products and differ from private fund frameworks, global managers operating across jurisdictions have adapted internal valuation practices to support consistency, audit readiness and cross-border comparability.

Accounting standards reinforced this evolution. The U.S. adoption of Accounting Standards Codification Topic 820: Fair Value Measurement (ASC 820) and the European adoption of International Financial Reporting Standard 13: Fair Value Measurement (IFRS 13) established consistent fair value measurement principles and expanded disclosure requirements, including valuation hierarchies and transparency around inputs and assumptions. While largely converged, differences remain, including:

• ASC 820’s net asset value (NAV) practical expedient, which permits estimation of fair value for certain investments under defined conditions when observable market prices are not available.
• The continued use of local Generally Accepted Accounting Principles (GAAP) by certain smaller or non-listed European funds, which may allow historical cost accounting.
• IFRS 13 restrictions on recognizing certain inception gains or losses when fair value relies on unobservable inputs.

Together, regulated fund governance frameworks and fair value accounting standards raised the baseline for valuation discipline across private markets.

Structures That Scale: Fund Design and Operational Impact

Regulatory reforms in both regions have encouraged greater transparency, more formal governance and clearer liquidity frameworks. Over time, these developments supported the emergence of fund structures that impose operating and reporting discipline more commonly associated with regulated/public funds.

• Business Development Companies (BDCs). Established under the 1940 Act, BDCs operate within a regulated framework for investing in illiquid assets, with periodic NAV determination and reporting. The structure has expanded to include non-traded publicly offered and private BDCs, many of which determine NAV monthly.
• Interval funds. Adopted following SEC Rule 23c-3, interval funds allow closed-end funds to offer periodic liquidity while maintaining predominantly illiquid investment profiles. These structures typically require valuations aligned to defined subscription and redemption intervals, increasing operational and governance demands.
• European evergreen structures. In Europe, evergreen private market structures with periodic subscriptions and redemptions have grown more common, particularly among institutional strategies seeking greater structural flexibility while maintaining long-term investment horizons.
• ELTIF 2.0. The revised European Long-Term Investment Fund framework enhanced disclosure, reporting and redemption standards relative to the Alternative Investment Fund Managers Directive (AIFMD). These requirements extend beyond IFRS 13 by calling for more detailed discussion of valuation methodologies, frequency, assumptions and NAV determination practices across asset classes.

Collectively, these structures increased operational complexity and raised expectations around valuation cadence, documentation and governance.

Valuation Governance: Shared Objectives, Different Implementations

Valuation governance has become one of the most scrutinized elements of private fund operations. Historically, many managers performed valuations internally with limited formal challenge. Over time, both U.S. and European frameworks emphasized clearer responsibilities, stronger documentation and conflict mitigation.

Despite jurisdictional differences, modern valuation governance frameworks share common objectives:

• Consistency: valuations that are fair, repeatable and bias-free.
• Transparency: clear documentation of methodologies, inputs and assumptions.
• Oversight: defined review, escalation and conflict-management processes.
• Cadence alignment: valuation timing matched to fund terms and reporting obligations.

The goal is not identical practices across regions, but defensible and well-governed processes within each framework.

Accountability: Where the Models Differ

While U.S. and European frameworks share governance objectives, they differ in how accountability is structured and executed.

• U.S. model. Boards retain responsibility for fair value determinations and may designate the valuation function, subject to defined oversight and reporting requirements. The framework emphasizes segregation of duties and ongoing monitoring. External valuation firms are frequently engaged to support the valuation function as a means of strengthening process integrity and mitigating conflicts, though external independence is not mandated.
• European model. Under AIFMD, the fund manager remains responsible for asset valuation and NAV determination. Engaging an external valuer does not transfer or limit the manager’s liability. External valuers are accountable to the manager for negligence or failure to perform their duties and must be independent of portfolio management to address conflicts of interest.

For U.S. acquirers integrating UK/EU platforms, aligning governance models while preserving local regulatory expectations is often a key integration challenge.

Valuations Under the Microscope

Although valuation practices for private credit assets are converging globally, meaningful differences remain – particularly for illiquid instruments. As private credit markets have grown and fund structures evolved, regulators in both regions increased scrutiny of valuation processes, with emphasis on governance discipline, conflict identification and documentation integrity.

Supervisory approaches differ. In the U.S., oversight has historically been more enforcement-oriented, with examination findings and enforcement actions frequently tied to deficiencies in valuation process. In Europe, supervisory focus has tended to emphasize systemic risk, consistency of implementation and cross-border harmonization.

At a global level, the International Organization of Securities Commissions (IOSCO) has highlighted recurring areas for improvement in valuation practices, including:

• application of appropriate valuation expertise,
• quality and supportability of inputs and assumptions,
• assessment of whether an active market exists,
• identification of comparable assets or liabilities, and
• clarity and completeness of disclosures supporting fair value determinations.

Recent European reviews have cited challenges such as inconsistent documentation of conflicts of interest, insufficient separation of valuation responsibilities and limited use of ad hoc valuation procedures during periods of market disruption. In the U.S., examination priorities have reinforced expectations around valuation governance, particularly where valuations affect management fees.

The “Lowest Common Denominator” Effect

Evolving fund structures have increased operational demands on valuation processes. Where funds offer periodic subscriptions, redemptions or other NAV-based transactions, valuations must be performed at a frequency that aligns with those terms – even when the underlying assets remain illiquid.

For managers overseeing multiple funds, the vehicle with the most frequent valuation or liquidity requirements often establishes the operational cadence across the platform. This dynamic – commonly referred to as the “lowest common denominator” effect – can drive valuation cycles well beyond what individual funds might otherwise require.

Transitioning to more frequent valuation processes, including in some cases daily NAV determination, requires meaningful investment in valuation professionals, market data, systems and governance infrastructure. As a result, valuation readiness increasingly functions as a platform-level capability rather than a fund-specific consideration.

Conclusion

As private credit markets continue to mature, valuation practices are becoming more consistent, transparent and operationally embedded. While U.S. and European regulatory frameworks are converging, differences remain in how governance and accountability are implemented.

For fund managers – and particularly for U.S. firms acquiring UK/EU platforms – valuation readiness is a practical indicator of operating maturity. Well-governed valuation processes support audit defensibility, regulatory alignment and consistent financial reporting.