It is still early days for private credit litigation in the UK and Europe. But many are predicting an increase in claims on this side of the Atlantic over the next 12-18 months. The US is currently ahead, mainly because the market there is bigger and more mature and the push into retail-adjacent channels (including wealth management distribution) is further advanced. But the picture in the UK is developing fast.  

The underlying mechanism is somewhat trite but reliable: it is losses that lead to litigation. Few investors care how they were sold an investment while it is performing. But when investors lose money, they scrutinise what they bought, in considerably more detail than they did at the time they bought it, and often with the benefit of hindsight.  So, if and when the credit cycle turns, or funds suffer large losses on individual loans in the meantime, investor claims are inevitable.  

In one sense, there is nothing new about these sorts of claims. Many of them will be misselling claims of the kind English courts saw at scale after the last financial crisis, focusing on representations made during the selling process and on appropriateness/suitability(depending on the distribution model). The likely targets are the fund manager/GP and its affiliates and the wealth managers and intermediaries who advised on or recommended the investments.

One of the key lessons from the litigation already underway in the US is that aggrieved investors will cast their nets widely when challenging representations made.  We have already seen attacks on disclosures made in relation to origination (deal sourcing), due diligence and credit underwriting; valuation and fees; and redemption dynamics, amongst other things.    

The push into retail further raises the stakes. Less sophisticated investors place greater reliance on what they are told in a sales process.  And individual investors may, in some cases, have a direct statutory remedy for losses caused by regulatory breaches, which means the regulatory perimeter and the litigation exposure are directly connected rather than related, but separate problems.

The main practical takeaway is that statements made to investors about, for example, borrower due diligence processes need to be accurate, not misleading and consistently applied in practice – in a way that can be evidenced years later.  That means maintaining processes which match the disclosures and carefully documenting those processes.  And where processes evolve, disclosures and documentation must evolve with them.          

In short, the best defence will be alignment: marketing, process and documentation telling the same story.