Alasdair Glass discusses the private credit disputes landscape in Global Relay Intelligence & Practice

The private credit market, having enjoyed over a decade of sustained expansion to surpass $2 trillion in global assets under management, now faces a confluence of pressures that may herald a significant wave of disputes. Investors seeking redemptions are finding their capital less accessible than expected, whilst the banks whose leverage underpins much of the sector’s architecture are retreating from riskier exposures. The interaction of these forces—liquidity constraints from above and withdrawals from below—creates the conditions for contentious litigation across a range of fronts. This article examines the principal categories of dispute likely to emerge as this dynamic plays out.

Redemptions

The first half of 2026 has seen a pronounced surge in investor withdrawal requests across the private credit sector. In the United States, major managers including Apollo, BlackRock and Blue Owl have imposed or tightened redemption gates on their credit vehicles. For example, Apollo’s flagship $15 billion retail credit fund saw redemption requests reach 17 per cent of fund value, prompting a cap at 5 per cent.

These pressures reflect broader investor anxiety about fraud, loan losses, AI-driven disruption in portfolio sectors, and downward revaluations of loan books by both credit funds and their bank lenders. The operation of gating mechanisms, the degree of managerial discretion involved, and the circumstances triggering gates all carry the potential to generate disputes between funds and their investors.

Back-Leverage

Concurrently, major lenders have begun curtailing back-leverage facilities to private credit firms. HSBC has signalled it will not finance riskier funds, and Barclays’ chief executive has spoken publicly of constraining lending to private credit counterparties with more vulnerable business models. Given that banks provide hundreds of billions of dollars in back-leverage annually, these decisions carry immediate consequences for fund managers and portfolio companies alike.

The vulnerability of this model was starkly demonstrated by the collapse of Market Financial Solutions (MFS), a UK specialist mortgage lender, in early 2026. MFS had assembled a £2.4 billion loan book funded through warehouse financing from major banks. When the firm failed amid allegations of fraud, creditors alleged an 80 per cent shortfall in verifiable collateral. Barclays absorbed a £228 million loss; HSBC recorded a $400 million impairment through Apollo-backed Atlas SP; and Santander disclosed $267 million in exposure. The FCA has opened a formal investigation.

Regulators have taken notice. The Chair of the ECB Supervisory Board has cautioned that back-leverage means the growth of private credit has not in fact shifted risk away from the regulated banking sector, and that the interconnections between the two create channels for shock transmission and amplification. The risk of a negative feedback loop—bank withdrawal triggering fund liquidity pressure, forced asset sales, and further markdowns—represents precisely the systemic concern the ECB has identified.

Investor claims

Disputes between funds and their investors can arise in diverse ways. They may centre on precise terms governing investor redemptions, including the distinction between automatic caps and managers' discretion to gate funds, and what investors were told about liquidity risks.

Gates

Gates are contractual limits which restrict the amount of money investors can withdraw from funds during a specific period. They exist to prevent forced disposals at distressed prices and, in principle, to preserve value for the investor base as a whole. However, where fund documentation affords managerial discretion in their operation, questions arise as to whether that discretion has been exercised rationally and in good faith. Conflicts become acute where fund managers or affiliates redeem their own holdings while other investors remain gated, or where certain institutional investors receive preferential treatment through side letters or selective exercise of discretion.

Additionally, pro rata redemption mechanics can incentivise sophisticated investors to submit inflated withdrawal requests to maximise their share of available liquidity—disadvantaging those who submit genuine requests at face value.

Disclosure

The extension of private credit products to retail and wealth clients has broadened the scope for mis-selling claims. A central tension exists between marketing materials promising flexible access to private market returns and the structural illiquidity of the underlying assets.

Claims may focus on whether investors were adequately informed of the fund’s dependence on bank back-leverage, whether concentration risks in the underlying portfolio were sufficiently describer or whether the circumstances triggering gates or suspensions were properly explained.

Potential causes of action include breach of contract, misrepresentation, negligence, breach of fiduciary duty and breaches of obligations under the FCA Handbook.

The availability of litigation funding may enable group actions by retail investors with individually modest losses.

Valuation

Valuation of assets under management has the potential to become one of the litigation battlegrounds. Because the underlying assets are illiquid, valuations depend heavily on models, assumptions and managerial judgement. Across the sector, valuation stress is evident – for example, BlackRock’s TCP Capital Corp reported Q4 2025 write-downs reducing NAV by 19 per cent. Stressed markets may prompt claims that NAVs were overstated, adjusted too slowly or applied inconsistently, whilst distressed strategies and loan-to-own activity could raise further questions around mandate drift and conflicts.

Claims may be advanced on the basis of breach of the fund manager's duty of care owed to investors, contractual breach of an obligation to value assets in accordance with the methodology in the fund documentation; or misrepresentation where published NAVs were materially misleading. Third party valuers and auditors may also face exposure. Key questions will include whether assumptions were reasonable, valuation processes sufficiently independent, and methodologies consistently applied.

Bank disputes

Disputes may equally arise between funds and their back-leverage providers. Key issues include whether banks were contractually entitled to decline facility renewals, whether margin calls or collateral markdowns were commercially reasonable, and whether covenants relating to portfolio concentration or NAV triggers were breached.

Matters can escalate quickly as demonstrated by the MFS collapse. Barclays detected anomalies in MFS's collateral pool in November 2025 and by January 2026 had frozen MFS's accounts. The administrators of MFS have now brought proceedings to attempt to clawback those frozen funds. Such claims may examine whether protective actions were timely, proportionate and consistent with the bank’s contractual obligations. Facility agreements commonly contain bank-favourable provisions dealing with material adverse changes, rights relating to events of default, and discretionary rights to call for additional collateral or decline further advances. Where discretion exists, the 'Braganza duty' established in Braganza v BP Shipping requires it to be exercised in good faith and for proper purposes, a standard that will be closely scrutinised in any ensuing litigation.

Practical recommendations

A growing litigation pipeline around semi-liquid private credit funds is anticipated as liquidity, valuation and governance mechanisms come under pressure. Managers and investors should therefore be stress-testing their documentation and decision-making processes now, before disputes crystallise.

Fund managers should review documentation so that gating mechanisms, discretionary powers and valuation methodologies are clearly described and consistently applied. For banks providing back-leverage, facility documentation should clearly define the bank's rights to mark collateral, call margin and decline to renew. The exercise of those rights should be clearly documented with cogent rationale.

Investors must also understand their contractual rights and protections, document decision-making around redemption requests, and obtain and preserve evidence of representations made both before investment into the fund and during the investment period. Early legal advice where there is the potential for a claim is essential.