Adviser Alert: Private Credit Funds

Denver - May 27, 2026 - The Colorado Division of Securities (Division) is issuing this adviser alert to state-licensed investment advisers (advisers) to bring attention to the escalating risks, generally illiquid, and often opaque nature of private credit funds. These complex products have frequently been in the news over recent months. There is growing concern that the market may be facing increasing stress, the underlying loans could be higher-risk, and some issuers have capped investor redemption requests.

What are Private Credit Funds?

Private credit funds are non-bank investment vehicles offered by private fund issuers. Issuers pool investor funds together to make loans directly to private, frequently mid-sized companies. Profit is generated for investors from the interest paid on the loans. These products are often referred to as "interval funds," as they only allow investors to redeem a maximum set percentage of shares at specific time periods, or intervals. [1]

Key Risks to Consider
Private credit funds are increasingly being marketed to licensed investment advisers as a product option for retail investors. [2] The funds may offer to provide a higher return over the long term compared to lower risk and more liquid products. Advisers who recommend or are consider offering the funds should fully understand the product's features, including the risk profile of the assets held in the fund, how they are valued, and the liquidity constraints. See below for more details on the key risks of private credit funds.

• Lack of transparency and model-based valuations: Unlike public bond markets where prices update constantly based on active trading and standardized disclosures, private credit operates with limited transparency. Loans are negotiated privately, and valuations are frequently "model-based," meaning they rely on projections and assumptions about a borrowing company's future performance rather than market-tested prices. This lack of transparency can mask building risks, making it difficult to assess the true value of a client's holdings until a stress event occurs.
• Liquidity risk and fundamental mismatches: One of the most significant risks associated with private credit is the fundamental mismatch between long-term assets and investors' short-term liquidity expectations. Funds lend money over a period of years, locking up capital in assets that are generally not easily tradable. However, they often allow investors to potentially withdraw capital on much shorter timelines, often quarterly. The ability for investors to withdraw funds could be delayed for a longer period. If too many investors attempt to withdraw at once, liquidity can quickly dry up. This often becomes particularly pronounced during stressed market conditions. Consequentially, funds may be forced to limit or halt withdrawals entirely, mark down asset value, or sell them at steep discounts. Several funds have recently limited investor withdrawals.
• Suitability and the potential risk for loss: Private credit is often marketed on its stability of returns. However, private credit does not guarantee returns or even the return of principal. [3] If borrower defaults rise, especially among the mid-sized companies that heavily rely on this financing, the losses will directly impact investors' asset values. Advisers must recognize that the steady, predictable yield historically marketed by these funds carries underlying structural risks that may be unsuitable for clients requiring capital preservation or reliable liquidity.

Best Practice Recommendations
To ensure compliance with fiduciary duties and the Colorado Securities Act, the Division recommends advisers adopt the following best practices when considering private credit funds for client portfolios:

• Conduct due diligence: The complex and risky nature of the product requires thorough knowledge of the offering. Do not rely solely on marketed yields or other sales materials provided by the funds. Read the prospectus closely and do not dismiss the risk warnings as performative or "just legalese." Advisers must thoroughly investigate the fund's underlying assets, fee structures, leverage use, liquidity conditions, and the methodology used to value the fund's private, illiquid loans. The due diligence should be well documented and maintained in the adviser's records.
• Evaluate liquidity needs: Carefully assess and document a client's short- and medium-term cash needs before recommending products that may impose withdrawal restrictions or lock-up periods. Private credit should only be recommended to clients who can afford to tie up their capital for any extended lock-up periods.
• Ensure plain-English disclosure: Clearly communicate the specific risks of illiquidity, lack of transparency, risk of the underlying assets, and valuation modeling to clients. Provide the prospectus to clients but be sure that clients understand that terms like "income fund" or "direct lending" carry significantly different, and often higher, risks than traditional bonds or public fixed-income ETFs. Disclose how private credit funds are relevant to the firm's investment strategy and discuss the significant and unusual risks of private credit funds in detail on the firm ADV Part 2 brochure (See Item 8).
• Document suitability: Maintain robust and current, written documentation demonstrating why the specific recommended private credit investment is suitable for each client considering the risks disclosed in the product prospectus. This documentation should explicitly detail how the investment aligns with the client's overall portfolio size, risk tolerance, appropriate concentration levels, and long-term investment objectives and liquidity needs.
• Adopt policies and procedures: Build a strong compliance foundation by documenting compliance processes. Following detailed written procedures or utilizing written compliance checklists will help ensure consistent application of best practices and demonstrate that each recommendation is supportable and, in the client's best interest. The Division recommends that firm's written procedures address product due diligence and monitoring, disclosure, general suitability guidelines for specific products including portfolio allocation limits, record keeping, and documenting procedures have been followed.

This alert along with other investment adviser compliance resources can be found on the Division's website at IA Guides and Resources. If you have any questions or need to contact the Division, our phone number is 303-894-2320 or you can email us at [email protected].

[1] See FINRA: Interval Funds - 6 Things to Know Before you Invest, January 9, 2025.

[2] See FEDS Notes: Private Credit: Characteristics and Risks, by Fang Cai and Sharjil Haque, February 23, 2024.

[3] The Prospectus for a commonly recommended private credit fund states, "The Fund's investment program is speculative and entails substantial risks. There can be no assurance that the Fund's investment objectives will be achieved or that its investment program will be successful. Investors should consider the Fund as a supplement to an overall investment program and should invest only if they are willing to undertake the risks involved. Investors could lose some or all of their investment."