In one set of marketing materials, the UK lender Market Financial Solutions told backers it had issued £45.4 million of loans in 2011. Its filed accounts for that year recorded £196. The gap sat in the public record, there for anyone who looked.

MFS collapsed in February amid allegations of double-pledged collateral and circular refinancing. A worldwide asset freeze now covers its founder and the FCA has opened an investigation. Barclays has taken a £228 million hit and HSBC a charge of around $400 million through indirect exposure. Yet experienced institutions kept lending while the evidence sat on the public file, which should trouble the sector more than the collapse itself.

The strength of private credit, the dense web of funds, banks, sponsors and intermediaries that moves capital quickly, is also its main weakness. One borrower’s misrepresentation can spread into losses across the market, because no single lender sees the whole picture and too many assume someone more sophisticated has already done the checking.

Validation that runs in a circle

A respected name in a deal becomes a substitute for the work itself. Call it herd diligence. If a large manager is already lending, the thinking goes, the checks must have been done. Backing by established firms lent MFS a credibility that discouraged harder questions, and each lender’s involvement reassured the next.

This is not only a problem for less experienced firms. Last year HPS Investment Partners, among the most sophisticated direct lenders, then being acquired by BlackRock, lent more than $400 million against fabricated invoices and worthless collateral. The borrower’s record already held lawsuits, regulatory actions and bankruptcies. The information was there. Nobody connected or challenged it in time.

A model built for a different market

Two structural features make this likely, not unlucky. The first is fragmented visibility: a single borrower now draws on private credit funds, bank facilities, NAV lines and warehouse structures, so no lender sees its total leverage or whether the same collateral sits behind another loan. The second is timing. Diligence is too often a one-off exercise at origination. Concerns about MFS reportedly grew through 2025 as questions went unanswered, but the checks that mattered had been done at the start, when the story still held together.

The sector’s diligence model was built for a bilateral, point-in-time world. The market it now serves is networked and continuous, and regulators are pressing on the gap. The Bank of England’s system-wide exploratory scenario treats private credit as a financial stability question, and a House of Lords report, Private Markets: Unknown Unknowns, warned in January that supervisors cannot see into much of it. For the lenders themselves the pressure is closer to home. The FCA’s investigation into MFS concerns its compliance with the Money Laundering Regulations, and for authorised managers those systems-and-controls duties now sit with named senior individuals who are personally accountable.

Fraud has not become undetectable. Catching it now depends on looking across the network, not only at the counterparty in front of you, and on doing it continuously instead of once. It means mapping ownership, relationships and counterparties across the financing chain and watching them as conditions change. Some of that is capability; the rest is cultural and collective.

The warning signs in private credit’s recent failures were rarely invisible. The job now is to build a market structured to see them.

This is the problem Themis works on. We help lenders and investors map the network around a borrower and screen the ownership, related parties and counterparties for sanctions, adverse media and other integrity risks, then keep monitoring as conditions change. The result is an auditable record of the checks that were done, the thing an investment committee, an LP, an insurer or a regulator wants to see when asking whether the diligence was adequate. Read more about our work with private credit firms.

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