Private Credit’s Investigative Deficit

When Market Financial Solutions (MFS) entered administration in February 2026, its creditor list read like a directory of global finance. Leading institutions had extended more than GBP 2 billion in credit lines to a Mayfair-based bridging lender whose loan book, it soon emerged, contained a GBP 1.3 billion collateral shortfall. A High Court judge cited accusations of fraud and double-pledging. The founder had reportedly left the country. More than 130 connected entities accounted for nearly a fifth of the firm’s client base.

Many sophisticated institutions had missed what was, in retrospect, visible in the public record. And MFS is not an isolated case. It is the latest in a pattern of fraud across the private credit landscape that has collectively cost institutional lenders billions of dollars in the past 12 months.

Four collapses, one pattern

In September 2025, Tricolor Holdings, a Dallas-based subprime auto lender, filed for Chapter 7 liquidation after warehouse lenders discovered that loan portfolios had been pledged as collateral to multiple banks at the same time. The fraud ran from at least 2018. JPMorgan Chase and Fifth Third Bancorp absorbed combined losses exceeding USD 340 million. In December 2025, prosecutors charged Tricolor’s CEO, Daniel Chu, with bank fraud.

That same month, First Brands Group, a Cleveland-based auto parts supplier with USD 5 billion in annual revenue, filed for Chapter 11. Investigators found USD 2.3 billion in fabricated receivables, a further USD 2.3 billion in double-pledged inventory, and approximately USD 2 billion in undisclosed off-balance sheet liabilities spread across more than 100 affiliated entities. In January 2026, the company’s founder, Patrick James, and his brother were indicted.

In mid-2025, leading private credit investors disclosed losses exceeding USD 500 million from Bankim Brahmbhatt, a borrower who had fabricated invoices from major telecoms companies using forged email domains. The scheme ran for five years. It was discovered only when an analyst noticed irregularities in the sender addresses on customer correspondence.

These were not marginal businesses. They had institutional creditor bases, audited financial statements, and in several cases credit ratings that remained stable until weeks before default.

One feature connects each episode. All four were founder-owned businesses with no private equity sponsor. This matters because the vast majority of successful private credit funds that have scaled quickly do so by financing PE-backed companies, where they can rely on the diligence already conducted by the sponsor. When the borrower is instead a founder-controlled business with no institutional equity investor, the credit investor is, in effect, the only set of eyes on the counterparty. In each of these cases, those eyes were not looking deeply enough.

What the standard process missed

Each case followed a recognisable sequence. The business grew rapidly, outpacing its creditors’ oversight capacity. Corporate structures were opaque, spanning multiple entities and jurisdictions. Collateral was pledged to more than one lender in the absence of centralised verification. Documentation was falsified or manipulated.

These are not novel fraud typologies. Double-pledging and receivables fabrication are well understood. Yet they succeeded at scale because the prevailing due diligence model in private credit remains oriented toward financial analysis and credit assessment rather than investigative depth. Standard processes test whether a borrower can repay. They do not reliably test whether the borrower is who they claim to be, whether the collateral exists, or whether the corporate structure conceals related-party transactions.

The problem has been compounded by competitive dynamics. As private credit has expanded into territory once held by traditional bank lenders, the pressure to deploy capital quickly has compressed diligence timelines. Processes that once took weeks have been condensed to days. Speed has become a selling point. The result, in too many cases, is that investigative rigour has been traded for velocity. Howard Marks of Oaktree Capital, writing in November 2025, captured the dynamic precisely, observing that such failures are “not systemic but systematic.” Good times produce complacency and carelessness. Imprudent lending and business fraud cluster because they share a common origin in the erosion of discipline during periods of competitive intensity. PIMCO’s Christian Stracke was more direct, describing the current environment as a crisis of poor underwriting rather than market fundamentals. Cambridge Associates noted that most high-quality managers identified warning signs early in the Tricolor and First Brands cases. The differentiator was the investigative depth of their diligence.

Regulators are paying attention

In December 2025, the Bank of England launched its second System-Wide Exploratory Scenario exercise, focused specifically on private markets. The Financial Policy Committee noted that private equity-sponsored businesses now account for up to 15% of UK corporate debt and 10% of private sector employment. The exercise aims to address data gaps about how stress propagates through the private credit ecosystem.

In the UK, the failure-to-prevent-fraud offence under Section 199 of the Economic Crime and Corporate Transparency Act came into force in September 2025. Large organisations now face strict criminal liability if an associated person commits fraud intending to benefit the organisation. The only defence is to demonstrate that reasonable prevention procedures were in place. For private credit managers, this creates a direct obligation to ensure that due diligence frameworks are genuinely robust rather than procedural.

The SEC’s 2026 examination priorities highlight private credit at an unprecedented level of specificity. The IMF’s October 2025 Global Financial Stability Report found that more than 40% of private credit borrowers had negative operating cash flow at the end of 2024. The direction of travel is clear: managers who lack documented, credible approaches to fraud prevention and counterparty verification will face increasing scrutiny from regulators, allocators, and their own institutional investors.

The case for a lookback

Increasingly, investors with existing portfolio exposure will be compelled to assess whether latent fraud indicators already exist within current counterparty relationships.

The evidence from the past year suggests that warning signs are available well before a collapse. MFS’s network of related-party borrowers was traceable through Companies House filings. Tricolor’s abnormally high margins and opaque off-balance sheet arrangements were noted by managers who avoided the name. First Brands’ labyrinthine funding structures and discrepancies between its operating history and reported sales prompted red flags at firms with genuinely investigative processes.

This points to a practical course of action. Investors should consider a structured lookback across their counterparty relationships, with particular attention to founder-controlled businesses without institutional equity sponsors. The indicators these cases have shown to be material include: related-party networks, verification gaps, cross-jurisdictional complexity, growth trajectories inconsistent with underlying business economics, and discrepancies between public filings and representations made to lenders.

Where investigative diligence makes the difference

Wallbrook’s approach to counterparty due diligence combines deep records analysis across multiple jurisdictions with human source intelligence gathered through networks of sector and country specialists. We do not rely on automated screening or database aggregation. Our mandates are staffed by subject matter experts who operate under a single global P&L, meaning the analyst conducting the work has genuine expertise in the relevant jurisdiction and sector rather than a generalist following a checklist to maximize billability. Furthermore, our reports have always stood up to regulatory scrutiny in all previous credit cycles.

What distinguishes this approach in the current environment is the ability to place counterparty risk within the broader dynamics of the market, sector, and geography in which a borrower operates. The fraud cases of 2025 and 2026 occurred in sectors characterised by rapid growth, competitive pressure on underwriting standards, and structural opacity. Identifying latent risk requires understanding those dynamics and knowing what patterns to look for within them.

For private credit managers and their allocators, the value of investigative due diligence is now a given. The focus has shifted to whether existing frameworks can actually capture the risks that standard processes consistently overlook.