The Private Credit Valuation Mark: Mid-Mark, Bid, or Indicative Fair Value?

A small but consequential choice of mark

IFRS 13 is clear that fair value is an exit price. Within a bid-ask spread, IFRS 13.70 requires use of "the price within the bid-ask spread that is most representative of fair value in the circumstances": bid prices for asset positions and ask prices for liability positions are explicitly permitted, but not required, and IFRS 13.71 does not preclude the use of mid-market pricing or other practical-expedient conventions used by market participants. In practice, the majority of private credit managers report a mid-mark to their LPs and to their auditors, and a smaller subset systematically reduces the mark towards the bid side.

The difference is not cosmetic. For a typical unitranche position, the bid-ask in the secondary market — where it can be observed at all, through specialist intermediaries — is commonly 150–300bps of price. For a $500M portfolio marked at 99 on a mid basis, moving towards the bid can reduce reported NAV by $750k–$1.5M per percentage point of the adjustment. That is the size of issue that drives investor committee discussion and, increasingly, regulatory interest.

Why the mid-mark persists

There are stronger reasons and weaker ones. The stronger case is that, for assets held with the intention and capacity to hold to maturity, the mid-mark is a reasonable indication of economic value, and the bid-ask gap reflects a market-microstructure cost that the fund may not actually incur — a use that IFRS 13.70–71 expressly accommodates as a practical expedient within the spread. The weaker case is that mid-marks can flatter reported returns and reduce quarter-to-quarter volatility in ways that are commercially useful but harder to defend against the exit-price principle without supporting evidence.

The FSB and IOSCO have signalled in their 2023–2024 thematic work that valuation practice across the NBFI sector deserves continued attention, and that the analytical work to evidence the chosen mark is uneven across managers. Reporting on these themes has flagged valuation smoothing as one of the issues being tracked in the private credit sector.

The third-party pricing service market

Institutional LPs — particularly US public pension plans and insurance companies — now frequently require third-party pricing service validation for Level 3 private credit holdings. The market is led by a small number of providers: Houlihan Lokey, Lincoln International, Valuation Research Corporation (VRC), Kroll, and a handful of other specialist firms. Each provides independent fair value opinions on a position-level basis, typically quarterly.

The pricing services do not necessarily agree with each other. Observed dispersion across providers on the same position is commonly 50–150bps of spread, driven by differences in comparable set construction, recovery assumption, and illiquidity premium. A manager that uses a single provider is exposed to that provider's house view; the more sophisticated approach is to benchmark against multiple providers and reconcile differences.

The three calibration approaches

In the valuation support files we see from credit managers and pricing services, three calibration approaches dominate. They are complementary rather than mutually exclusive, and a well-constructed valuation support file will triangulate between them.

• DCF with risk-adjusted spread — project contractual cashflows, adjust for expected loss, discount on OIS plus a calibrated credit spread. This is the anchor technique.
• Comparable market multiples — observed spreads on comparable BSL or HY positions, adjusted for illiquidity and covenant differences.
• Recovery analysis — enterprise value waterfall driven by EV/EBITDA multiples observed in the M&A market, used to bound downside and anchor the LGD assumption.

The LP sensitivity ladder

The practice of providing a single-point mark without a sensitivity disclosure is disappearing. Institutional LPs — led by large Canadian and Nordic pensions — now routinely require a sensitivity ladder at each reporting date. The most common structure is a three-by-three grid of ±50bps on discount spread, ±10 percent on LTM EBITDA, and ±25 percent on recovery rate.

This is also broadly consistent with the quantitative disclosures required under IFRS 13.93 for Level 3 instruments, though the GAAP disclosure minimum is narrower than what LPs now routinely ask for in their side letters.

Where the practice is converging

The direction of travel is clear even if the pace is uneven. We expect the gap between mid and bid to narrow, sensitivity disclosures to become mandatory in all jurisdictions with private fund oversight, and third-party pricing validation to become effectively standard for any fund with institutional LP capital. Managers with systematic valuation infrastructure — reproducible pipelines, versioned assumption sets, auditable curves — will navigate the transition more cleanly than those still reliant on spreadsheet workflows.