BlackRock Fund Plunges 45% as DOJ Probes Private Credit Valuations

Federal prosecutors are investigating BlackRock's publicly traded TCP Capital fund, a move that throws the often-opaque valuation methods of the $1.8 trillion private credit market into the spotlight. The probe by the Manhattan U.S. attorney’s office follows a jarring 19% cut to the fund's net asset value in January, which erased nearly a fifth of its worth and sent its stock price tumbling.

"If someone is marking to make a fee, that’s just a non-starter," Jay Clayton, a former head of the Securities and Exchange Commission, said at a Managed Funds Association conference this week, reinforcing the regulatory focus on valuation. While not commenting on BlackRock specifically, his statement reflects a broader crackdown on how private assets are valued.

The fund, TCP Capital Corp. (TCPC), saw its shares plunge 13% on the day of the January announcement—the largest single-day drop since March 2020. The stock has continued to suffer, down 45% over the past year and trading significantly below the net asset value estimated by its managers. The write-down was driven by reductions in the value of several loans that had been marked at or near their original cost just months earlier.

The investigation into TCPC, which has a market value of about $350 million, highlights a core vulnerability in the booming private credit market. Because these loans are traded infrequently, if at all, their valuation is a subjective process, often relying on third-party firms and quarterly manager estimates. This opacity has fueled investor skepticism, leading to sell-offs in publicly traded funds and a rush for the exits in non-traded private credit funds.

Valuation Under Scrutiny

The probe into BlackRock's fund is part of a wider regulatory examination of private asset valuations. The U.S. Attorney's Office for the Southern District of New York has been seeking information regarding TCPC's valuation practices for several months. This scrutiny from federal prosecutors could lead to increased regulatory pressure and demand for greater transparency across the private credit industry.

In response to growing concerns, some industry players are taking proactive steps. Apollo Global Management, for instance, announced this month that it would begin offering daily valuations for its private-credit funds, a significant shift toward greater transparency in an effort to quell investor fears about opaque and infrequent marking of assets.

A Sore Spot for BlackRock

While TCPC represents a tiny fraction of BlackRock's vast assets under management, its poor performance and the subsequent federal investigation are a reputational headache for the world's largest asset manager. BlackRock acquired the fund in 2018 as part of its acquisition of Tennenbaum Capital Partners.

The sharp write-down and the ensuing fallout have led to multiple class-action lawsuits filed on behalf of investors, alleging that the fund made "materially false" statements and failed to properly value its loan portfolio. The investigation could result in significant penalties and force a reckoning within the private credit market, potentially leading to stricter valuation standards and greater investor protections.

This article is for informational purposes only and does not constitute investment advice.