Leyla Kunimoto Warns Private Credit Valuations Mask Impairments via Opaque Level 3 Marks

Private credit valuations rely heavily on unverifiable internal models rather than market-driven pricing mechanisms, according to Leyla Kunimoto, founder of Accredited Investor Insights.
Speaking with Hedgeye CEO Keith McCullough at the Hedgeye Investing Summit, Kunimoto cautioned that because the majority of private debt instruments are classified as Level 3 fair-value assets with no observable market quotes, asset managers have broad discretion over markdowns and performance reporting:
- Fund managers determine carrying values using proprietary discounted cash flow and recovery models, obscuring key underwriting inputs and distress assumptions from external investors.
- Kunimoto highlighted the private credit financing package behind software company Medallia as a clear case study: after the loan became distressed, holding marks on the exact same debt tranche diverged significantly across different participating asset managers.
- This structural dispersion raises systemic questions regarding the reliability of reported net asset values (NAVs) across the rapidly growing private debt sector, particularly as higher borrowing costs challenge corporate cash flows.