Litigation: Private credit’s liquidity crunch – a new frontier - The Law Society Gazette

Alasdair Glass, counsel at Signature Litigation, writes in The Law Society Gazette that the February collapse of Market Financial Solutions (MFS) is an early symptom of a broader stress across the private credit sector. MFS, a UK specialist mortgage lender, had built a £2.4bn loan book financed through warehouse facilities extended by some of the world's largest banks. Following fraud allegations and claims of an 80% shortfall in verifiable collateral, losses spread quickly: Barclays recorded a £228m hit, HSBC a $400m impairment routed through Apollo-backed Atlas SP, and Santander $267m in exposure. The Financial Conduct Authority has opened a formal investigation, and MFS's CEO has denied all wrongdoing.

The article describes two forces squeezing the sector at once. Investor redemption requests have risen sharply, and banks that supply back-leverage are stepping away or restricting lending. In the first half of 2026, Apollo, BlackRock, Blue Owl and others imposed or tightened withdrawal gates on credit vehicles. Apollo's $15bn retail credit fund saw redemption requests reach 17% of fund value and capped payouts at 5%. Partners Group restricted withdrawals from its $8.6bn Global Value SICAV, an evergreen private equity fund, after requests hit roughly 9.8% of NAV. Investor concerns cited include fraud in underlying portfolios, loan losses, AI-driven disruption in software, and downward revaluations. HSBC has told clients it will no longer finance riskier private credit funds, and Barclays' chief executive has spoken of constraining lending to certain structured finance counterparties. The ECB Supervisory Board chair has warned that these interconnections can transmit and amplify shocks across the financial system.

The article anticipates litigation in four areas: disputes over gating discretion and preferential side-letter treatment; challenges to valuations, including a April Grizzly Research report alleging up to 40% of Partners Group's evergreen fund assets were materially overmarked, which Partners Group calls based on 'false assumptions' and says it is evaluating legal action against; mis-selling and disclosure claims, particularly where retail and wealth clients were not told of bank-leverage dependence or gating terms; and fund-lender disputes over facility renewals, margin calls and collateral write-downs, where banks' discretion is subject to the Braganza duty of good faith and proper purpose. Glass advises fund managers to review documentation and valuation governance, banks to document every exercise of collateral and margin rights, and investors to preserve evidence of representations made at investment. He concludes that disputes arising from this stress will test the contractual architecture, disclosure standards and governance frameworks underpinning the sector.