Rubric Capital has alerted its investors to what it describes as potentially misleading accounting practices by some private credit lenders that raise money from retail investors. In a Feb. 18 letter seen by Reuters, the $3 billion hedge fund said several business development companies - closed-end vehicles that lend to smaller businesses - have been shifting borrowings off their balance sheets in the days surrounding quarter end, then reinstating the liabilities a few days after the reporting date.
The letter, written by the hedge fund, said the pattern gives the appearance that these BDCs are less indebted at the close of a quarter, only for the debt to reappear on subsequent filings. "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 said.
Rubric's note goes further, alleging the use of repo-like loans from one particular investment bank as the mechanism for moving the debt off balance sheets in the short term. The hedge fund did not identify the investment bank or the BDCs it accused, and the letter cautioned that the conduct was being used to mask leverage rather than to provide a sustained reduction in indebtedness.
Rubric Capital declined to comment when contacted. The firm did not name the bank or the BDCs, and Reuters was unable to independently establish whether the practice is being used broadly or at a more limited scale.
Market observers say private credit has been under strain and closer scrutiny after several high-profile defaults. The hedge fund's warning arrives amid persistent unease in the private credit market following the bankruptcies of auto parts maker First Brands and subprime lender Tricolor last year, events the letter cited as part of the context for rising anxiety.
The Rubric letter noted that the BDC industry oversees more than $300 billion in assets under management and represents roughly one quarter of direct lending in the United States, citing a Bank for International Settlements note from July. BDCs operate as closed-end investment vehicles and may be privately held or listed on public exchanges.
The letter drew a direct analogy to Enron, saying that the scale of distribution concerns had driven what Rubric described as deceptive accounting moves. Enron's collapse in 2001 followed the use of off-balance-sheet arrangements and other accounting techniques to conceal significant debt, a comparison Rubric used to characterize the seriousness of the behavior it was alleging.
Rubric Capital's founder was identified in other market notes as having spent a decade at Point72 and beginning his career at the Blackstone Group in restructuring. A June note from Morgan Stanley referenced those prior roles and stated that, as of May 2025, the firm managed around $3 billion in assets.
The letter also flagged concerns around investor liquidity and redemption mechanics in privately traded BDCs. While these vehicles are required to provide quarterly liquidity, Rubric pointed out that managers often cap redemptions at 5% of net assets. If redemption requests reach 10% of net assets, investors may ultimately be prevented from withdrawing further funds because the funds can stop redemptions, the letter warned.
Rubric underscored that rising costs and persistent investor appetite for distributions are squeezing managers. "This is leading to dodgy industry behavior with funds increasing leverage instead of taking their medicine and reducing distributions," the letter said, arguing that some managers may be opting to obscure leverage rather than cut payouts.
The hedge fund's note referenced market measures of stress, citing estimates that private credit defaults run between 3% and 5%. It also said indicators of distress - including the increased use of interest paid-in-kind financing to assist troubled borrowers - are approaching post-pandemic highs, a point attributed to UBS in the letter.
Rubric's communication to investors lays out a portrait of a segment of credit markets under pressure: managers confronting distribution demands and higher costs; vehicles with constrained redemption mechanics; and, according to the hedge fund, isolated instances of balance-sheet engineering using short-term financing arrangements. The letter stopped short of naming individual firms or quantifying how widespread the practices might be, leaving those details unconfirmed.
Investors and market participants reading the letter are left with the firm’s view that short-term maneuvers around quarter end have been used to present a healthier-looking leverage profile, but with open questions about prevalence, scale and the institutions involved.