Estimated reading time: 2 minutes

The article in brief:

• Private credit funds differ in how long they believe historical cost continues to represent fair value for new investments.
• Specific circumstances may influence the application of fair value and valuation methodology.
• Review best practices and maintain proper documentation of all valuation procedures, processes, and methodologies, as well as periodic valuation support to ensure audit and regulatory compliance and investor trust.

Accounting and regulatory standards (FASB, IASB, and SEC Rule 2a-5) require investments to be reported at fair value. However, immediately after closing, a loan or credit investment is typically recorded at cost (the amount funded), which represents fair value.

In practice, private credit funds rarely hold assets at cost for an extended period after closing. A recent VRC survey indicates that most private credit funds revalue new investments within the first valuation period (generally up to three months post-closing). However, practices vary; some funds determine fair value immediately at closing, while others, less commonly, continue to assume that historical cost represents fair value for up to six months post-closing, unless a material known event or a large market move triggers revaluation.

Best Practices

To ensure compliance and investor confidence:

• Document policies clearly. Private funds should explicitly state their approach to consideration of historical cost in determining fair value in written policies and procedures.
• Align with SEC expectations. The SEC emphasizes a simple principle, “Say what you do and do what you say.” Consistency between the stated policy and actual practice is critical.
• Prioritize transparency. Clear communication of valuation methodology, processes, and procedures protects both private funds and their investors, reducing regulatory risk and fostering trust.

Special Considerations for Early Assessment

Even if a policy defers remeasurement until quarter-end or later, certain security types and features may warrant immediate review at closing. These items require careful evaluation, specialized modeling tools, judgment, and comprehensive documentation to ensure compliance with GAAP and tax standards.

• Warehouse line of credit. Under U.S. GAAP, a revolving debt facility can be measured at amortized cost or at fair value, but never at cost once the fair value option (FVO) is elected. By default, the drawn amounts are measured at amortized cost, with any related issuance costs deferred and amortized ratably over the facility term, regardless of draw status. The FVO election is determined on an instrument-by-instrument basis at initial recognition and is irreversible. Once elected, the facility is measured at fair value with subsequent changes recognized in earnings. Changes related to an entity’s own credit risk flow through Other Comprehensive Income. Electing FVO can simplify hedge accounting, reduce accounting mismatches, and eliminate bifurcation of any embedded derivatives. Amortized cost accounting reduces earnings volatility and ASC 820 fair value processes and disclosures.
• Original issue discount (OID). OID requires tracking an amortization schedule using the effective interest method, which depends on the chosen yield-to-maturity. In addition, IRS rules for income recognition may differ from U.S. GAAP.
• Investments with embedded equity features and delayed fee structures. In both traditional middle-market and venture-capital lending, debt instruments can be structured with embedded detachable warrants and exit fees. Under ASC 820 fair value accounting standards, the fair value of the debt instrument and the embedded warrant must be bifurcated and recorded as separate assets.
• Make-whole fees and call options. A make-whole provision adjusts redemption payments based on a reference rate, introducing variability into future cash flow estimates. Correctly modeling flows is crucial for fair value measurement. An embedded make-whole call can trigger separate option models, which can significantly affect the debt’s valuation. Covenants and early redemption features must be evaluated to determine if they are clearly and closely related to the host contract; if not, they require bifurcation.

How VRC Can Help

Since 1975, VRC has supported private market investors with rigorous, independent valuation services anchored in consistency, transparency, and technical depth in both valuation complexities and capital markets. Our Portfolio Valuations team provides scalable solutions, structured frameworks, well-documented methodologies, and clear governance practices that help clients navigate evolving expectations from auditors, regulators, and investors.

As private markets expand and face increased scrutiny, VRC’s independent perspective and five decades of experience help sponsors build valuation programs that are transparent, repeatable, and defensible—across cycles, capital structures, and fund vintages.

If your organization is looking to refine its valuation policies, benchmark its governance framework, or strengthen independent oversight, our team is ready to help. We encourage you to contact the article authors or a VRC professional near you.