Podcast: Credit Funds: Compliance Considerations For Valuation

Author:Mr Jeremiah Williams and Catherine B. White
Profession:Ropes & Gray LLP

In this Ropes & Gray podcast, Jeremiah Williams and Casey White discuss compliance issues surrounding the valuation of debt investments held by credit funds. Debt investments create unique valuation challenges for sponsors making such determinations, such as managing potential conflicts of interest. This podcast discusses certain regulatory compliance considerations relevant to the valuation of debt instruments and the importance of instituting and following valuation policies and procedures.


Casey White: Hello, and thank you for joining us today for this Ropes & Gray podcast, the latest in a series of podcasts aimed at credit funds. My name is Casey White, and I am an associate in the asset management group. And joining me is Jeremiah Williams, a partner in our litigation and enforcement practice group with a focus on securities and futures enforcement. Today, we'll be talking about some of the compliance issues facing managers with respect to the valuation of investments held by credit funds. So Jeremiah, private credit funds often hold investments that do not have a readily available market value, so valuation is ultimately determined by the sponsor. Are there unique risks associated with assigning values to debt investments that the SEC would expect to be clearly explained to investors in offering documents?

Jeremiah Williams: Ultimately, from a regulatory perspective, the concerns are the as in a traditional buyout fund - information presented to prospective and existing investors should not be materially misleading. However, there are various risks associated with debt investments that create unique valuation challenges, such as prepayment and default, as well as interest rate risks, each of which can undermine yield assumptions critical to a valuation determination. The SEC will expect to see a description of these challenges, their impact on valuation determinations, and the risks they create for investors, as well as the conflicts of interest they present, clearly disclosed in the fund's offering documents.

Casey White: Can you talk about what types of conflicts and compliance considerations arise where sponsors are making these types of valuation decisions?

Jeremiah Williams: Yes. When private funds hold illiquid assets that are expected to be difficult to value and for which market prices are not readily obtained from third parties, the sponsor itself will often be responsible for determining the value of those...

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