From Valuations to Liquidity: Why Governance Is the Last Line of Defence Against the Debt Crisis

By Grant Harding, FCA, CPA, MBA,

Independent Director at Daymer Group

Ever-increasing regulatory expectations and a new era of technology have placed mounting pressure on boards of directors, especially those overseeing investment funds.

Unfortunately, the situation is worsening; there is a tsunami on the horizon, which is being fuelled by rapidly growing global public debt. This debt is projected to exceed 100% of global GDP by 2029, reaching levels not seen since the post-WWII period[1]. Increasing debt will prolong high interest rates and keep pressure on the private debt market, worsening current liquidity constraints. Boards must immediately prioritize scenario planning, strengthen risk oversight, and enforce rigorous valuation governance to navigate this inevitable storm.

From fundraising through the full capital cycle, valuation integrity is paramount. In difficult market conditions, there can be a subtle but significant incentive for investment managers not to impair assets prematurely. Leaving aside the impact that valuations have on fees, valuations strongly influence investor decisions. Market uncertainty can challenge even the most skilled experts to build a solid narrative to support forecasts. Directors must often rely on their own judgment, vague assumptions, and management's representations. Directors should scrutinise how fair values are calculated, check that updated and robust policies are in place and being followed, and insist on an independent review process. The board must focus on its role: challenge management's assumptions and resist deferring the inevitable.

High-water marks and carried interest provide similar roles in ensuring performance fees are earned only after past losses are recovered; however, when such targets at times appear unreachable, boards must question if management remains motivated to deliver the best returns for investors, particularly when costs of managing under-performing or complex assets begin to outweigh potential reward. This strains the alignment of interests, which underpins the trust between the investor and management. The board must ensure that management continues to have sufficient “skin in the game”.

Liquidity risk is a growing pressure point. Boards should regularly assess fund liquidity strategies and assess their alignment with long-term objectives. When investors themselves are strained, delays in funding can occur. The board needs to evaluate the risks and benefits before accommodating individual investor requests and weigh the impact of introducing flexibility on governance consistency and fund liquidity. Directors must ensure that management has a clear process for asset sales to meet obligations and that decisions do not compromise overall portfolio strength.

Rising sovereign and corporate debt has increased default probabilities across sectors. This calls for more rigorous monitoring and stress testing policies. For portfolios with private debt, boards must assess whether collateral values are sufficient to cover exposures.

Crucially, directors must question how recoverable that collateral will be in the event of default. Enforceability of collateral arrangements can often be overlooked until it is too late.

Across all fund types, the tightening of global credit conditions creates a reinforcing loop that will inevitably lead to the alignment of interests to erode. Strong governance is the only effective counterbalance. Boards must insist on transparent reporting, independent valuation oversight, and consistent application of policies. Ensuring at all times that the fund’s governance architecture is sufficiently independent and competent to handle the complexity to come.

Stress testing should become routine, modelling liquidity freezes, investor redemptions, and impairment of assets. Disclosures must be clear and timely, especially where valuations depend heavily on assumptions. Finally, the board composition itself deserves attention: directors must possess the technical expertise to challenge management on complex valuation, credit, and liquidity matters.

The coming years will test the resilience of investment governance frameworks. The risks faced by funds can be structural and not just cyclical. The storm is on the horizon and fast approaching. Boards must act decisively, challenge assumptions relentlessly, and strengthen governance structures now. Effective governance means being fully prepared to face the storm when it hits the shore.

The original version of this article was featured in Accountancy Today magazine.

[1] https://www.reuters.com/world/asia-pacific/imf-sounds-alarm-about-high-global-public-debt-urges-countries-build-buffers-2025-10-15/