A major hedge fund is raising red flags about potentially deceptive financial practices within the private credit industry, warning that some companies may be artificially improving their financial appearance.
Rubric Capital, a $3 billion investment firm led by former Point72 executive David Rosen, issued a warning to its investors in a February 18th letter obtained by Reuters. The firm alleges that certain business development companies (BDCs) – which provide loans to smaller businesses – are temporarily moving debt off their books at the end of each quarter to appear less leveraged than they actually are.
According to the letter, these companies then restore the debt to their balance sheets just days after the quarterly reporting period ends. The hedge fund described this practice as utilizing repo-style loans from a specific investment bank to conceal actual debt levels.
“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 stated.
Rubric Capital did not identify which investment bank or BDCs are allegedly involved in these practices, and Reuters could not independently confirm the scope or scale of such activities. When contacted, Rubric Capital chose not to provide additional comments.
The private credit sector has faced mounting pressure recently following high-profile bankruptcies, including auto-parts manufacturer First Brands and subprime lender Tricolor in the previous year. These failures have intensified examination of an industry that has experienced rapid expansion, attracting significant institutional investment and increasing its role in corporate lending.
The BDC sector manages more than $300 billion in total assets and represents approximately 25% of direct lending activity across the United States, based on data from a Bank for International Settlements report published in July. These closed-end investment vehicles operate both as private entities and publicly traded companies.
The comparison to Enron references the energy company’s 2001 collapse after it was revealed to have used off-balance-sheet entities and other accounting manipulations to conceal tens of billions in debt obligations.
Rosen, who established Rubric after spending a decade at Point72 (previously known as SAC Capital), began his finance career in restructuring at Blackstone Group. Morgan Stanley reported in June that the firm managed approximately $3 billion in assets as of May 2025.
Current private credit default rates are estimated between 3% and 5%, while indicators of financial stress – including paid-in-kind interest arrangements that help struggling borrowers meet debt payments – are approaching their highest levels since the pandemic, according to UBS analysis.
Private BDCs must provide quarterly liquidity options for investors, though they cap redemption amounts at 5%, Rubric Capital’s letter noted. When redemption requests reach 10% of total net assets, investors may find themselves unable to access their funds as these investment vehicles can suspend all withdrawals.
Increasing operational costs combined with persistent investor expectations for regular distributions have created significant pressure on BDC management teams, Rubric Capital observed.
“This is leading to dodgy industry behavior with funds increasing leverage instead of taking their medicine and reducing distributions,” the hedge fund’s letter concluded.
