Private Credit Fund Losses — FINRA Arbitration Lawyers

What are private credit funds and why do investors lose money in them?

Private credit funds are investment vehicles — typically structured as limited partnerships, interval funds, or business development companies (BDCs) — that make direct loans to middle-market companies, real estate borrowers, or other borrowers who cannot access traditional bank financing or public bond markets. These funds earn income through loan interest and fees and distribute a portion of that income to investors. The marketing pitch is compelling: higher yields than investment-grade bonds, low correlation to public equity markets, and relatively stable distributions.

The investment fraud problem is not with private credit as an asset class but with how it is sold to retail investors. Private credit funds are fundamentally illiquid — investors in interval funds may be limited to quarterly redemptions of 5% of fund assets, and non-traded BDCs may have no liquidity at all until a liquidity event is triggered years after investment. The underlying loans are private, unrated, and marked to model rather than to market — meaning the reported net asset value may not reflect actual impairment until credit losses are crystallized. When the credit cycle turns, private credit funds can experience rapid deterioration that is invisible to investors until it is too late to exit.

The post-pandemic era of rising interest rates and tightening credit conditions has produced a significant wave of private credit fund investor losses. Funds that performed well in the low-rate environment of 2010-2021 faced rising default rates, impaired NAVs, and suspended distributions when rates rose and leveraged borrowers came under stress. Retail investors who were told these funds were “bond alternatives” or “low-volatility income generators” — and who were not told about the illiquidity, the leverage, the model-based valuation, or the credit cycle risk — have viable FINRA arbitration claims against the broker-dealers who recommended them.

Private credit fund fraud and misconduct patterns

• Unsuitable recommendations: private credit funds are suitable only for investors with long investment horizons, no near-term liquidity needs, and sufficient financial sophistication to understand direct lending credit risk. Recommending interval funds or non-traded BDCs to conservative, income-dependent, or elderly investors is a suitability violation.
• Illiquidity misrepresentation: brokers who describe quarterly redemption windows as adequate liquidity without disclosing that redemption requests may be gated or that secondary market sales produce significant discounts misrepresent a material characteristic of the investment.
• Model-based valuation misrepresentation: presenting a private credit fund’s NAV as a reliable indicator of value without disclosing that the portfolio is marked to model — not to market — conceals the potential for sudden NAV reductions when impairments are finally recognized.
• Fee disclosure failures: private credit funds carry management fees, performance fees, origination fees, and fund expenses that collectively reduce investor returns. Presenting yield projections without disclosing the full fee burden is a material omission.
• Overconcentration: placing a significant portion of an investor’s portfolio in private credit funds — particularly when combined with other illiquid alternative investments — creates concentration and liquidity risk that violates FINRA suitability standards.
• Failure to supervise: brokerage firms whose supervisory systems fail to detect patterns of unsuitable private credit fund recommendations bear independent FINRA Rule 3110 liability.

Why Investors Are Facing Losses

Several factors can impact private credit performance.

Interest rates rose sharply in recent years. Many private credit loans carry floating rates. Higher rates increase income for investors but also increase borrowing costs for companies. If borrowers struggle to service debt, defaults can rise.

Private credit valuations also move differently from public markets. Because loans are not traded daily, values may appear stable even when underlying risks increase. When funds face redemption pressure or conduct asset sales, pricing adjustments may follow.

Liquidity restrictions can compound the problem. Investors who need access to capital may find their funds locked up. Even if the portfolio eventually recovers, the inability to exit can cause real financial strain.

Potential Legal Issues

When private credit funds are sold through financial advisors or broker-dealers, those advisors have legal duties.

They must recommend investments that are suitable for the client’s financial profile. That includes reviewing risk tolerance, investment experience, liquidity needs, income requirements, and overall portfolio allocation.

Potential issues may include:

Unsuitable recommendations
Failure to explain liquidity restrictions
Misrepresentation of risk
Overconcentration in illiquid alternatives
Failure to conduct adequate due diligence
Failure to properly supervise sales practices

Private credit funds often appeal to income-focused investors. If a retiree or conservative investor was heavily allocated to illiquid private credit strategies, that may raise suitability concerns.

Overconcentration is a common issue. Even if one private credit investment may be appropriate in limited amounts, placing too much of a client’s portfolio into similar illiquid products can increase risk significantly.

The Role of Disclosure

Offering documents for private credit funds typically contain extensive risk disclosures. But legal claims often focus on what was actually communicated to the investor.

Did the advisor clearly explain that capital could be locked up for years?
Did they explain that redemptions could be limited or suspended?
Did they describe the possibility of borrower defaults?
Did they discuss how valuations are determined?

If the investment was presented as stable or bond-like without a full explanation of structural differences, that may be important.

Oversight of broker-dealers and enforcement of industry standards falls under the authority of FINRA. Investors can learn more about regulatory protections and arbitration processes through FINRA.

Investor Recovery Options

If your private credit investment was sold through a brokerage firm, your dispute will likely proceed through arbitration rather than court. Most brokerage agreements require arbitration.

Bakhtiari & Harrison is investigating potential investor claims involving a Blue Owl Capital private retail credit fund that permanently restricted investor withdrawals. The first question many investors ask is simple. Is this an early warning sign? Is this like August 2007, when small cracks in credit markets showed up before the financial crisis exploded?

FINRA arbitration allows investors to present evidence before a panel. If the panel finds that the broker or firm failed to meet suitability or disclosure obligations, it can award damages.

Timing matters. Arbitration claims are subject to eligibility rules and deadlines. Waiting too long to evaluate your situation may limit your options.

If you invested directly without a broker, your legal path may differ. In some cases, claims may involve misrepresentation or offering document issues. Each situation depends on the specific facts.

Why choose Bakhtiari & Harrison as your private credit fund loss lawyers

• $250 million+ recovered. Four decades of results for investors in FINRA arbitration and securities litigation nationwide.
• Former FINRA NAMC Chairman. Ryan Bakhtiari served as Chairman of the FINRA National Arbitration and Mediation Committee from 2013 to 2017.
• Former Morgan Stanley in-house counsel. David Harrison spent years as Morgan Stanley Dean Witter in-house counsel and began his career as a Series 7-licensed representative at Shearson Lehman Brothers.
• Dedicated experience in FINRA arbitration. Selecting counsel with specific FINRA arbitration expertise is the single most important decision an investor claimant makes. Bakhtiari & Harrison’s practice is dedicated to investor-side FINRA arbitration and securities litigation.
• FINRA hearings near you. FINRA arbitration hearings are held at the venue nearest the claimant’s residence.
• Contingency fee representation. No recovery, no fee. Initial consultations are free.

Frequently asked questions — private credit fund losses

What is the difference between a private credit fund and a traditional bond fund?

A traditional bond fund holds publicly traded, rated bonds with daily liquidity and market-based pricing. A private credit fund makes direct loans to private companies — the loans are not publicly traded, not rated by major rating agencies, and valued by the fund manager rather than by the market. The liquidity difference is fundamental: a traditional bond fund can be sold any business day at NAV; a private credit fund may lock up capital for years. This distinction is the core of most suitability claims — investors who believed they were purchasing a bond-equivalent income vehicle were not told they were buying an illiquid, model-valued, unrated credit portfolio.

How do I know if my private credit fund recommendation was unsuitable?

The key questions are whether your broker adequately disclosed the illiquidity restrictions, the model-based valuation, the credit cycle risk, and the leverage — and whether the investment was consistent with your liquidity needs and risk tolerance. If your broker described the fund as a “safe income alternative” or “bond substitute” without disclosing that you might not be able to access your capital for years, you may have a viable claim. Bakhtiari & Harrison provides free evaluations.

What is the deadline to file a private credit fund FINRA arbitration claim?

FINRA Rule 12206 requires claims to be filed within six years of the events giving rise to the dispute. The clock typically starts at the time of the unsuitable recommendation — not when losses are fully realized. Contact Bakhtiari & Harrison promptly for a free evaluation.

What damages can I recover for private credit fund losses?

Prevailing investors recover compensatory damages — the difference between what a suitable investment would have returned and what you actually received — plus consequential damages and prejudgment interest. In cases involving deliberate misrepresentation of liquidity or valuation, FINRA panels can award punitive damages. Bakhtiari & Harrison evaluates the full range of recoverable damages in every initial case review.

Contact our private credit fund loss lawyers — free consultation

Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys evaluate every potential claim at no charge. Contact us today.

Investor cases are handled on a contingency fee basis — no recovery, no fee.

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