Hedge fund Rubric Capital has warned investors that some private credit firms may be using aggressive accounting practices to mask leverage, raising concerns about transparency and risk in parts of the rapidly growing market, according to a report by Reuters.
In a recent investor letter seen by Reuters, the $3bn hedge fund Founded by former Point72 portfolio manager David Rosen, said certain business development companies (BDCs) appear to be temporarily shifting debt off their balance sheets around quarter-end, making leverage levels look lower than they are. According to Rubric, the borrowings reappear shortly after reporting periods, suggesting the use of short-term, repo-like financing arrangements.
Rubric said the behaviour reflects mounting pressure on managers to maintain investor distributions amid rising defaults and tighter financing conditions. The hedge fund described the practices as “Enron-like accounting games”, arguing that fears over distribution cuts are driving some managers to obscure their true financial positions rather than reduce payouts.
The firm did not identify the investment bank or BDCs involved, and declined to comment publicly. Reuters said it was unable to independently verify the scale of the practice.
The warning comes as scrutiny of private credit intensifies following recent high-profile bankruptcies and signs of stress across the sector. BDCs, which account for roughly a quarter of US direct lending, manage more than $300bn in assets, according to the Bank for International Settlements.
Rubric also highlighted liquidity risks for retail investors, noting that many privately traded BDCs cap quarterly redemptions at 5%. If requests rise further, funds may suspend withdrawals altogether, potentially locking investors into stressed vehicles.
Rubric Capital said defaults in private credit are running at between 3% and 5%, with warning signs such as payment-in-kind interest nearing post-pandemic highs, citing data from UBS.
The hedge fund said rising funding costs and persistent demand for income are pushing some managers to increase leverage rather than confront weaker fundamentals — a trend it warned could amplify losses if market conditions deteriorate further.
