Scrutiny in Private Credit Is Expanding, Creating New Litigation Risks for BDCs, Credit Managers, and Retail Distribution Channels 

As we have been monitoring and predicted, recent scrutiny on the rapidly expanding private credit market has begun to directly translate to increased litigation risk. This alert (i) summarizes the current litigation landscape, (ii) identifies two emerging developments that could signal a meaningful expansion in the scope and nature of potential disputes, and (iii) offers guidance for market participants to continue to minimize exposure.

As regulator, investor, and market scrutiny of private credit intensifies, litigation risk is expanding. Recent cases show that disputes are no longer limited to securities fraud claims against Business Development Companies, or “BDCs” (the investment vehicles that provide investors exposure to shares in private credit loans) and claims are no longer only tied to portfolio valuation and disclosures. Rather, claims are now extending to investment advisers’ fee structures and to broker-dealers and other distributors of private credit products. Market participants should assess disclosures, valuation procedures, fee arrangements, and distribution practices to reduce exposure.

Key Takeaways:

• Private credit litigation is expanding and is no longer confined to securities fraud claims against BDCs.While recent suits have focused on alleged misstatements concerning valuation and liquidity, new theories are emerging that target other participants in the private credit ecosystem.
• Investment advisers now face a more direct litigation threat.The recently filed Delman v. Blue Owl Credit Advisors LLC, 26-cv-3468 (S.D.N.Y.) casesignals an effort to challenge private credit managers under the Investment Company Act by attacking the fee structure and emphasizing alleged conflicts in portfolio valuation processes, potentially broadening exposure.
• Retail distribution channels are becoming an area of risk.As private credit products are sold more broadly through broker-dealers and other intermediaries, plaintiffs are exploring claims under theories of suitability, Reg BI, disclosure adequacy, liquidity mismatches, and overconcentration in alternative investments.
• Valuation, liquidity, and redemption practices remain the core pressure points.Scrutiny of portfolio valuation, payment-in-kind features, software-sector exposure, and redemption limits are likely to remain central to both current and future claims.
• Market participants should assess litigation preparedness.BDCs, private credit managers, and broker-dealers should review disclosure controls, valuation processes, fee arrangements, advisor training, and product suitability to mitigate risk.

The Current Litigation Landscape

As shown in the table below, the majority of private credit-related litigation has been predicated on securities fraud theories. Over the last several months BDCs and their executives faced a spate of event-driven class action lawsuits alleging securities law violations under Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Many of these suits were filed amid a challenging first quarter of 2026, marked by rising investor redemption requests, funds holding firm to their quarterly redemption caps, and AI-driven disruption to the software sector. In that environment, suits alleged that BDCs made material misrepresentations in their public disclosures.

The securities fraud actions share a common damages theory. They allege that the defendant BDC provided a materially false representation of the health and value of its portfolio, particularly through inflated NAV figures, while concealing information about exposure. The alleged corrective disclosures—such as public earnings releases, short-seller reports, or sudden markdowns in NAV—allegedly revealed that portfolio values were lower than reported, causing a decline in share price and alleged investor losses.

None of these cases has reached the motion to dismiss stage, and O’Melveny is actively monitoring how decisions on initial dismissal motions will shape the legal framework. In the meantime, companies should continue to carefully evaluate the accuracy of their disclosures regarding the value of the portfolio, the current redemption environment, liquidity constraints, investments in software companies, payment-in-kind features, fees, and the valuation methodology and process.

Newly Emerging Risks

In addition to the risks identified in our prior alert, we are seeing emerging claims against (i) private credit managers and (ii) distributors of private credit investments.

1. Claims Against Credit Managers

In Delman v. Blue Owl Credit Advisors LLC, 26-cv-3468 (S.D.N.Y.), plaintiff sued Blue Owl Credit Advisors, a private credit fund manager—invoking a legal theory that could lead to a significant expansion of potential litigation risks.

Rather than challenging whether a BDC’s disclosures were misleading (the approach of the earlier cases), the Delman complaint criticizes the underlying fee arrangement between a BDC and its investment adviser. Plaintiff alleges that by obtaining excessive fees from Blue Owl Capital Corporation (“OBDC”), Blue Owl Credit Advisors violated Section 36(b) of the Investment Company Act of 1940, which imposes a fiduciary duty on investment advisers to registered investment companies (like BDCs) “with respect to the receipt of compensation.” The crux of plaintiff’s theory is that the BDC’s investment adviser has a significant conflict of interest that creates an incentive to inflate portfolio valuation and enrich itself at investors’ expense; specifically, because the investment adviser serves as OBDC’s “Valuation Designee,” it allegedly inflated the reported value of OBDC’s portfolio in order to increase its advisory fees. The complaint claims that total advisory fees increased 47% over five years, from $282.4 million in 2021 to $414.4 million in 2025, while the fund’s shares traded at a 20% or greater discount to reported NAV since November 2025. Plaintiff seeks to recover advisory fees under Section 36(b) of the Investment Company Act of 1940 and to rescind the investment advisory agreement under Section 47(b).

The lawsuit is significant because it escalates risk beyond issuers to investment advisers and attacks the inherent management and fee structure of BDCs. Notably, plaintiff faces a high bar to show the fee was “so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”¹ To mitigate risk, market participants should evaluate how management and incentive fees are calculated and closely review portfolio valuation procedures.

2. Claims Against Distributors

Another emerging area of risk is to broker-dealers and other distributors that have recommended private credit products to retail investors. Asset managers routinely offer private credit exposure on various platforms, and this expansion into retail channels raises the prospect of new claims by retail investors currently experiencing losses. We have observed a noticeable uptick in plaintiffs’ firms actively soliciting potential claimants under the following theories:

• Allegations that broker-dealers failed to adequately evaluate the risk of private credit investments.
• Claims that broker-dealers failed to align investors’ needs and liquidity expectations with the realities of semi-liquid private credit investments.
• Failure to disclose material facts regarding redemption limits or the degree of valuation uncertainty.
• Breach of the SEC’s Regulation Best Interest if private-credit BDC shares were recommended without assessing the client’s needs or disclosing conflicts of interest, such as commissions tied to the sale.
• Claims that financial advisors overconcentrated investors’ portfolios in allegedly “illiquid,” private-credit alternatives.

Broker dealers and other participants in the distribution channels can actively address this risk by (i) identifying which BDCs have been recommended and in what concentrations, (ii) ensuring that advisors are appropriately trained to match investor risk profiles with private credit investments, and (iii) ensuring robust disclosures that inform customers of the current redemption environment, liquidity constraints, and the impact of AI disruption.

Implications

We continue to closely monitor these developments with our interdisciplinary team across financial services litigation and regulation, distressed litigation, and private credit. We encourage clients to proactively develop a risk mitigation strategy tailored to their exposure.

¹ See Jones v. Harris Assocs. L.P., 559 U.S. 335, 336 (2010) (citing Gartenberg v. Merrill Lynch Asset Management, Inc., 694 F.2d 923, 928 (2nd Cir. 1982)).

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Matthew W. Close, an O’Melveny partner licensed to practice law in California; Pamela A. Miller, an O’Melveny partner licensed to practice law in New York; Jennifer Taylor, an O’Melveny partner licensed to practice law in California; Meaghan VerGow, an O’Melveny partner licensed to practice law in the District of Columbia and New York; James M. Harrigan, an O’Melveny partner licensed to practice law in the District of Columbia and Maryland; Glen Lim, an O’Melveny partner licensed to practice law in California and New York; and Lauren M. Wagner, an O’Melveny partner licensed to practice law in New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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