Press reports have been swirling that the US attorney for the Southern District of New York is looking into valuation practices at BlackRock TCP Capital, or TCPC, an exchange-traded business-development company. It’s an investment vehicle somewhat akin to a conventional closed-end fund, but it focuses on direct lending to so-called private, middle-market companies.
Like most of its peers, TCPC uses borrowed money to magnify its returns with financial leverage. The impact of that leverage is an underappreciated part of the story in the press reports thus far, as are the broader implications for how pricing works in semiliquid vehicles.
The attention from prosecutors on TCPC appears linked to a nasty stumble that came up in January. At that time, the fund reported it would be slashing the net asset value of its shares by 19% for the fourth quarter of 2025, which added fuel to a fire of worry about the overall health of private credit markets.
Most asset managers use third-party pricing services to validate their own private loan valuations, but responsibility for deciding on a price ultimately falls to the asset manager. Without comparable public trades to use as a proxy, they rely on so-called unobservable inputs not derived from market activity or corroborated by other means, and flag those holdings as so-called Level 3 assets in their public filings.
Level 3 designations leave a lot of room for judgment. Firms usually estimate prices only once per month, and those valuations tend not to move much. The implication of the reported federal inquiry seems to be that BlackRock had been marking its holdings at higher prices than they deserved before the write-down.
BlackRock attributed roughly two‑thirds of the drop to six problematic companies, but the exposures weren’t just loans to those companies; equity and equitylike stakes amplified the move. E-commerce aggregator Razor looked like classic credit stress. But education-tech provider Edmentum had equity exposure to the tune of 1.9% of the portfolio. Overall, the business-development company had 9.9% in equity exposure at the end of 2025’s third quarter. In private credit markets, big losses don’t require defaults, either. A change in recovery estimates, covenants, or sponsor assumptions can trigger them, too. Layer equity on top—warrants, preferreds, and common stock—and you add even more market sensitivity, so small valuation changes can produce big price swings.
The elephant in this room, though, is the aforementioned financial leverage used by most business-development companies. As of September 2025, this one had nearly $1 billion of borrowed money invested alongside $740 million of net assets, which increased the market exposure of TCPC’s portfolio to more than 230% of what it would have been. That played a huge role in the size of its 19% fourth-quarter 2025 loss. By contrast, had the same portfolio been unleveraged, its NAV write-down might have looked more in the neighborhood of an 8% loss.
That would be a painful number for such a short time period, but it doesn’t seem unrealistic for a portfolio with concentrated positions and meaningful equity exposure that wasn’t using any leverage. That begs the question of whether a federal criminal inquiry into the portfolio pricing of a highly leveraged fund might be an overreaction. There’s nowhere near enough public information to judge whether that’s the case here or not. There have been examples in which regulators concluded that asset managers made deliberate decisions to misprice assets. Over the past 30 years, though, only a tiny handful have been reported.
The real problem could be that there’s nothing unique about the BlackRock situation. Nearly all of its competitors use some financial leverage. Its own investment choices may have been poor, but infrequent, manual assignment of prices that don’t move that much is also an industrywide phenomenon. It’s an opaque exercise by definition, leaving an awful lot of room for judgment of the right magnitude and timing for the changing of a mark. If prosecutors decide to go after BlackRock for the way it prices private credit portfolios, it may find a string of other candidates for scrutiny lined up all the way down Wall Street.