A pair of shareholders has filed a lawsuit that puts a spotlight on the potential conflicts embedded in private credit valuation practices. On June 18, Martin Siegel and Thomas Kelly brought an action in the U.S. District Court for the Southern District of New York against Blue Owl Technology Credit Advisors, the investment adviser for Blue Owl Technology Finance Corp. (OTF), a publicly traded business development company (BDC) that primarily lends to software firms.
The complaint invokes Section 36(b) of the Investment Company Act of 1940, a provision enacted in 1970 that prohibits fund advisers from collecting fees that are not reasonably tied to the services provided. The plaintiffs allege that the adviser systematically overvalued OTF's hard-to-price assets, thereby inflating the fee base. According to the filing, the adviser's compensation surged 191% over five years, from $95 million in 2021 to $276 million in 2025, while OTF's assets grew by 134% over the same period. The plaintiffs argue that the fee increase far outpaced both asset growth and any corresponding increase in advisory work.
A key element of the complaint centers on payment-in-kind (PIK) income. Under PIK arrangements, borrowers pay interest by adding to the loan principal rather than remitting cash. OTF books this as income, and the adviser collects cash fees on that notional amount, with no clawback provision if the cash never materializes. In the first quarter of 2026, PIK interest and dividends totaled approximately $43 million, representing roughly 25% of net investment income. The filing notes that OTF's cash earnings did not cover its dividend during that period.
The case also challenges the oversight structure permitted under SEC Rule 2a-5, which allows a fund's board to delegate valuation duties to the adviser subject to board supervision. The plaintiffs contend that OTF's board provided insufficient oversight. They point out that the fund's five independent directors also serve on the boards of five other Blue Owl BDCs, and each received more than $1 million in total compensation in 2025 across the complex. This arrangement, the complaint alleges, gave the board "further reason to avoid challenging fee and valuation practices."
The timing of the lawsuit is notable. The filing asserts that the adviser took its highest compensation in OTF's history just as the fund experienced significant headwinds. OTF's net asset value per share fell 4.8%, and the fund recorded what the complaint describes as its largest losses ever—approximately $391.2 million—in the first quarter of 2026.
The complaint draws on broader regulatory scrutiny of BDC valuation practices. It references reports that the U.S. Attorney's Office for the Southern District of New York has been examining valuation methods at another BDC, BlackRock TCP Capital Corp., which is not a defendant in this case. The filing also cites a recent SEC enforcement action against a different adviser over loan pricing issues. These references underscore the growing attention regulators are paying to how private credit managers value illiquid assets.
For financial advisors, the lawsuit raises structural questions about fee arrangements in private credit funds. The plaintiffs do not argue that private credit is inherently flawed. Instead, they challenge a fee model based on gross assets and accrued income, with no clawback mechanism, which they say incentivizes managers to keep valuations high. Regardless of the court's eventual ruling, the case serves as a reminder to review how valuation and compensation interact in the funds you recommend. For more on recent legal challenges in the investment space, see our coverage of the Oregon Investors Allege Norada Capital Hid Ponzi Scheme in Promissory Notes and the Supreme Court Strips Activist Investors of Key Legal Tool in Closed-End Fund Battles.
The plaintiffs are seeking disgorgement of the allegedly excessive fees and a restructuring of the advisory agreement.
