Abstract

Private credit managers have the discretion and incentives to overstate values of their loan portfolios. To alleviate agency concerns that arise in pricing opacity, managers often delegate loan pricing to third-party valuation intermediaries. This paper studies how such intermediation affects valuation practices in private credit markets. We pair proprietary data with SEC filings to compare not only across managers, but also within their internal vs. external information environments. Third party pricing appears to be a widely used and effective tool that disciplines valuation practices. Creditors of the private credit managers themselves play a crucial role in enforcing valuation intermediation as a governance mechanism. However, the quality of their intermediation depends on informational inputs. During times of uncertainty, lead lenders receive better appraisals through incorporation of soft information from renegotiations. Overall, information asymmetry in lending relationships driven by the bespoke nature of direct lending appears to contribute to dispersion in reported marks, beyond often cited agency reasons.

Authors

Young Soo Jang, Pennsylvania State University, Smeal College of Business
Ginha Kim, University of Chicago Booth School of Business