By Nell Mackenzie
LONDON, Feb 26 (Reuters) – Some private credit firms that borrow from retail investors may be embellishing their financial health, Rubric Capital, a $3 billion hedge fund founded by a former Point72 star manager, warned its backers in a letter seen by Reuters.
The hedge fund said some business development companies (BDCs), which lend to small enterprises, are shifting borrowings from the balance sheet between quarters, making them appear less indebted, the February 18 letter shows. The debt then reappears on the balance sheet a few days after quarter end, it added.
“Our key takeaway from this behavior is that distribution cuts are so worrisome that some bad actors are playing Enron-like accounting games,” the letter said.
The firms are using repo-like loans from one particular investment bank to mask debt, the letter says.
Rubric Capital did not name the bank nor the BDCs involved and Reuters was unable to independently verify whether this practice is being deployed and at what scale.
Rubric Capital declined to comment when contacted by Reuters.
The private credit market has been gripped by anxiety in recent months since the bankruptcies of auto-parts maker First Brands and subprime lender Tricolor last year. The fallout has sharpened scrutiny of a market that has grown quickly, drawing large institutional investment and rising corporate lending in recent years. A renewed bout of uncertainty has flared up in recent weeks.
The BDC industry oversees over $300 billion in assets under management and accounts for roughly one quarter of direct lending in the U.S., according to a Bank for International Settlements note in July. The closed-end investment vehicles can be private or listed on stock exchanges.
Enron went bankrupt in 2001 after using off-balance-sheet vehicles and other accounting tricks to hide tens of billions of dollars of debt.
Before starting Rubric, founder David Rosen worked for 10 years at Point72, formerly called SAC Capital, and began his career at the Blackstone Group in restructuring, according to a Morgan Stanley note from June. The firm as of May 2025, oversaw around $3 billion in assets, said Morgan Stanley.
REDEMPTION FEAR
Private credit defaults are reportedly between 3% and 5%, and signs of strain—such as interest paid-in-kind financing used to help troubled lenders meet their debt obligations—are nearing post-pandemic highs, according to UBS.
Privately traded BDCs require quarterly liquidity for investors but these funds limit the amount investors can redeem at 5%, the Rubric Capital letter added. If redemption requests reach 10% of net assets, investors can eventually become locked out of their money as the funds halt any further flows.
Rising costs and an ever-present investor demand for distributions have put BDC managers under pressure, said Rubric Capital.
“This is leading to dodgy industry behavior with funds increasing leverage instead of taking their medicine and reducing distributions,” said the hedge fund’s letter.
(Reporting by Nell Mackenzie; Additional reporting by Isla Binnie; editing by Dhara Ranasinghe, Anousha Sakoui and Elisa Martinuzzi )
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