BlackRock's Credit Underwriting Faces Regulatory Scrutiny as DOJ Probes HPS Fraud

BlackRock's Credit Underwriting Faces Regulatory Scrutiny as DOJ Probes HPS Fraud#

The troubles besetting BLK's credit franchise took a sharper regulatory turn on 17 November when the U.S. Department of Justice initiated an investigation into telecom companies that borrowed approximately $400 million from the firm's HPS Investment Partners, backed by receivables that now appear to be fabricated. The probe, which arrives closely on the heels of the Renovo Home Partners writedown disclosed in early November, signals that underwriting failures plaguing BLK's private credit business may extend well beyond a single borrower's collapse into a potentially systemic pattern of due diligence gaps. For institutional investors already anxious about BLK's capacity to simultaneously execute infrastructure expansion and repair deteriorating credit portfolios, the DOJ investigation introduces a third and more acute tension: reputational and regulatory risk within the core private credit franchise itself, which sits at the epicentre of the firm's diversification strategy.

The investigation reveals that telecom companies misrepresented their receivables—the assets they pledged as collateral for the HPS loans—to secure financing that would otherwise have been unavailable to them under normal underwriting standards. This is not a marginal portfolio discovery. HPS, which manages BlackRock's direct lending and middle-market credit exposure, is supposed to be the firm's bulwark against exactly this kind of fraud: a disciplined, sophisticated credit operation staffed by professionals trained to detect financial manipulation and misrepresentation. That a cohort of telecom borrowers was able to engineer $400 million in fraudulent receivables-backed loans suggests either catastrophic failures in HPS's documentation review process or a willingness to overlook red flags in favour of origination volume—neither scenario is palatable to asset owners who have entrusted billions to the firm's putative expertise in credit assessment. The regulatory nature of the investigation, driven by the Department of Justice rather than an internal audit or third-party review, adds material weight to the allegation and raises questions about the scope of the DOJ's scrutiny and whether other HPS loan originations may be contaminated by similar misrepresentation.

What renders this moment particularly consequential for BLK is the temporal and thematic convergence with the broader portfolio stress narrative that dominated market discourse around the firm in early November. The Renovo Home Partners collapse—a $150 million near-total writedown on a construction company that HPS had funded despite mounting sectoral headwinds—already signalled to asset owners that the firm's private credit team had failed to execute adequate risk discipline. Now, barely two weeks later, the revelation that HPS loaned substantial capital to telecom companies with fraudulent collateral documentation suggests the underwriting failures are not isolated incidents but rather symptomatic of deeper institutional problems. Asset owners and analysts are beginning to ask whether HPS's underwriting standards have deteriorated structurally, whether the firm prioritised loan origination volume over credit quality, and whether the parent company's stated commitment to "disciplined capital allocation" extends to the credit franchise or applies only to the celebrated infrastructure partnerships announced by GIP.

The Fraud's Scope and Implications for Portfolio Quality#

The mechanics of the alleged fraud are straightforward but deeply troubling for BLK's reputation and management credibility. Telecom companies pledged receivables—future payment streams from their customers or vendors—as collateral for loans issued by HPS Investment Partners. These receivables, which should have been verifiable through basic financial audit and customer confirmation procedures, appear upon investigation to be fictitious or materially inflated. The DOJ's involvement suggests that the misrepresentation was not accidental or the result of aggressive accounting interpretations, but rather deliberate fraud engineered by the borrowing companies (and, potentially, with the knowledge or culpable indifference of HPS relationship managers). The magnitude—$400 million—places this not as a rounding-error portfolio event but as a material exposure loss that, if written down in full, would represent a significant hit to HPS's audited returns.

What the investigation does not yet reveal, but what institutional investors are now scrambling to assess, is whether the $400 million in fraudulent receivables represents an isolated cohort of bad loans or a leading indicator of a broader pattern of due diligence failures within HPS's portfolio. The Renovo writedown and the telecom receivables fraud share a common feature: both involved highly leveraged borrowers in sectors (construction, telecom) where demand visibility is poor and where operators face intense competitive pressure to maintain cash flows. If HPS approved high-leverage facilities to these constituencies without adequate collateral verification or cash flow stress-testing, then the question arises: how many similar loans remain on the firm's books? Are there other industries or borrower cohorts where HPS has been careless about documentation? Have asset owners been receiving candid assessments of credit quality from HPS teams, or have those teams been painting a rosier picture than the underlying fundamentals justify? These questions will likely dominate the next earnings call and may pressure management to commission an independent audit of the entire HPS portfolio.

The timing and disclosure mechanism also matter enormously for how asset owners interpret this event. The DOJ investigation was not voluntary disclosed by BLK but rather discovered and reported by news outlets citing Financial Times reporting. This suggests that the firm's internal risk and compliance functions either failed to flag the fraud or were not adequately empowered to bring it to public attention. Had BLK proactively disclosed the HPS issue alongside a comprehensive remediation plan, the market might have treated it as a contained problem and a sign of disciplined management. Instead, the firm is now in the awkward position of being forced to address the investigation after the fact, which inevitably raises questions about what else might be lurking in the credit portfolio and whether management is being fully transparent with investors about the scope of deterioration.

Asset Owner Confidence and the Implications for Diversification#

The broader context for this investigation is BLK's core investment thesis with its asset owner base: that the firm's diversified business model—spanning index products, active management, private credit, infrastructure, and real estate—provides resilience and consistent returns across market cycles. When one business struggles, the theory goes, others compensate, creating a stable earnings base and a durable competitive moat. That diversification narrative has come under considerable strain in recent months as both private credit (Renovo writedown, TCP Capital earnings decline) and the public equity business (market volatility, fee pressure) have weakened simultaneously. The HPS investigation now introduces the possibility that BLK's most vaunted competitive advantage—its ability to execute disciplined capital allocation across multiple platforms—may itself be questioned.

Institutional investors, particularly those with tens of billions of assets under management at BLK, are now forced to confront an uncomfortable question: if HPS (the credit team) has failed to detect $400 million in fraudulent receivables, on what basis can asset owners trust that the Global Infrastructure Partners team is adequately vetting the data centre, utility, and energy infrastructure deals that now constitute the firm's growth narrative? GIP operates at a vastly larger scale than HPS—the ACS partnership involves $27 billion in capital deployment, and the proposed AES acquisition would represent a $38 billion commitment. If HPS's due diligence standards have proven inadequate for $400 million in telecom loans, the reputational and actual financial risk of HPS-calibre due diligence being applied to multi-billion-dollar infrastructure deals is significant. This does not necessarily mean the infrastructure deals are bad—it means that asset owners will demand higher levels of scrutiny, third-party verification, and transparency before committing capital to new GIP offerings.

The risk of redemptions from BLK's private credit funds is now material. Many asset owners permit themselves to remain invested in higher-risk, lower-liquidity credit products predicated on the assumption that the fund manager possesses superior credit analysis, sourcing, and risk management capabilities. That assumption is now under scrutiny. If institutional investors conclude that HPS's standards have deteriorated, or if the DOJ investigation expands to reveal additional fraud or negligence, then large redemptions are likely. Such redemptions would force HPS to liquidate portfolio companies or loans at potentially distressed prices, crystallising losses and reducing the returns available to remaining investors. BLK's ability to fund its growth initiatives (infrastructure deals, potential acquisitions, capital returns to shareholders) depends partly on the stability of fee income from its private credit franchises. Significant redemptions could constrain the firm's financial flexibility precisely at the moment when it is attempting to deploy tens of billions of dollars into infrastructure partnerships.

The Tension Between Growth and Portfolio Repair Intensifies#

Management's Credibility Challenge#

When BLK released its Q3 earnings in late October, leadership attempted to project a narrative of disciplined capital allocation: the firm was simultaneously investing in high-growth infrastructure opportunities (GIP), maintaining its index and active management franchises, and managing through a difficult credit environment. The message to asset owners was clear: BLK is capable of executing multiple strategic imperatives at once, and the apparent tensions between growth and repair are manageable if leadership maintains discipline. That narrative now faces a credibility crisis. The Renovo writedown raised the first question mark about credit discipline. The HPS fraud investigation now raises a second, more damaging question: did management know or should have known about these underwriting failures, and if so, why were asset owners not informed? If management did not know—if the credit team's failures surprised senior leadership—then that speaks to inadequate oversight and control within the organization, which is perhaps even worse from an institutional investor's perspective.

Ricardo Rieder, BLK's global chief investment officer for fixed income, faces particular scrutiny in this moment. Rieder is a respected figure in credit markets and has been publicly cautious about the macro environment, warning that full employment and sticky wage pressures will persist headwinds for credit quality for years to come. His cautionary tone was interpreted by some market participants as prudent risk management. But if Rieder and his team were sufficiently concerned about credit deterioration to voice public caution, the question naturally arises: why did HPS continue to originate loans to highly leveraged telecom companies without adequate documentation verification? Were Rieder's macro warnings not translated into tighter credit standards at the HPS level? Did political or incentive pressures within the organization cause credit teams to ignore Rieder's caution and continue chasing origination volume? These are not trivial questions for asset owners to wrestle with.

Management's next opportunity to address these concerns is the Q4 earnings report and guidance session, expected to occur in late January 2026. At that moment, BLK will need to articulate, with credibility and specificity: what is the scope of the HPS fraud investigation; what remedial actions is the firm taking to tighten credit underwriting standards; what independent audit or review is being conducted of the broader HPS portfolio; and what is management's assessment of the probability and magnitude of additional loan losses in the credit franchise? Asset owners will be listening intently to the tone, granularity, and transparency of these responses. A defensive or evasive response will deepen concerns about management candour and potentially trigger additional redemption pressure. A detailed, transparent, and comprehensive response might begin to restore confidence that leadership understands the problem and is taking corrective action.

The Infrastructure Thesis Under Pressure#

The HPS investigation casts a shadow not only over the credit franchise but also over the infrastructure thesis that is central to BLK's growth narrative and the near-term catalyst for equity investors. GIP's strategy assumes that the firm can deploy tens of billions of dollars into data centre, utility, and energy infrastructure assets at returns that justify the capital deployment. That thesis depends partly on BLK's reputation with both asset owners (who must approve the capital deployment) and with the operational counterparties and vendors who execute the infrastructure strategies. If institutional investors lose confidence in BLK's financial discipline and due diligence standards, then GIP's ability to raise capital for new funds and to secure attractive deal terms with partners will deteriorate. Counterparties—construction firms, utilities, technology vendors—prefer to work with capital providers perceived as sophisticated, disciplined, and well-managed. A firm struggling with credit fraud and deteriorating underwriting standards sends the opposite signal.

Moreover, the infrastructure deals proposed by GIP often involve highly technical due diligence: power generation capacity, grid interconnection studies, technology infrastructure buildouts, and complex regulatory approval processes. If asset owners and partners are sceptical about BLK's basic financial documentation and underwriting discipline (as revealed by the HPS fraud), that scepticism may extend to questions about whether the firm can adequately execute the technical and operational due diligence required for sophisticated infrastructure investments. A deal that might have received eager capital commitments from asset owners in September 2025 may now encounter resistance or demands for more conservative terms in November 2025, simply because the HPS scandal has altered investor perception of BLK's competence and integrity.

Rieder's recent macro commentary—that full employment and sticky inflation will constrain credit returns for years—has implications for the infrastructure thesis as well. If employment and wage costs remain elevated, then the operating costs of data centre facilities and energy infrastructure will be higher, reducing the returns available to equity investors. Conversely, if a recession materialises and technology spending slows, then the urgency of data centre buildouts may diminish, and the valuations that justify GIP's deal economics may compress. BLK is thus caught in a narrow corridor of outcomes: the firm needs credit losses to remain contained and asset owner confidence to remain stable, whilst simultaneously executing multi-billion-dollar infrastructure deals that depend on sustained technology spending and capital availability. The HPS investigation has narrowed that corridor considerably, raising the execution risk on both fronts.

Outlook: Regulatory, Remedial, and Reputational Catalysts#

Near-Term Developments and Investigation Scope#

The immediate question for market participants is the scope and timeline of the DOJ investigation. Will the probe focus narrowly on the telecom cohort, or will investigators expand their scrutiny to other industries and loan types within HPS's broader portfolio? Will the investigation target only the borrowing companies (which appear to have committed the fraud), or will it expand to include HPS relationship managers and senior leadership who approved the loans? Will BLK itself face charges or penalties, or will the Department of Justice view this as primarily a borrower-side fraud issue? The answers to these questions will significantly influence how severely the market prices the reputational and financial risks. A narrow investigation focused on the borrowers would be less damaging; a broad investigation targeting BLK's oversight and control functions would be more damaging.

Management must also prepare for internal and external inquiries into how such a large fraudulent loan portfolio escaped detection. Investors will ask whether there were clear warning signs (unusual customer concentration, receivables not corroborated with third parties, inconsistent borrower financial reporting) that HPS teams should have caught. They will ask whether HPS had adequate staffing, systems, and incentive structures to execute rigorous due diligence, or whether the credit team was lean, under-resourced, and pressured to originate volume regardless of quality. Regulators and investors will demand documentation of the firm's risk management frameworks and whether those frameworks were actually followed in the approval of the telecom loans. This internal reckoning will likely result in personnel changes, process redesigns, and potentially significant charges related to remediation and litigation.

A parallel question concerns TCP Capital Corp, BlackRock's publicly traded business development company subsidiary, which itself is exposed to middle-market credit and has already reported deteriorating earnings and a stock price decline of over 34 per cent in the past twelve months. Will the HPS fraud prompt TCP Capital to acknowledge broader credit deterioration across its portfolio? Will the BDC's management lower its dividend or issue guidance that further damages investor confidence? TCP Capital's Q4 earnings report (expected in early 2026) will be scrutinised for any acknowledgment of credit quality issues that parallel the HPS fraud. If TCP Capital's management commentary compounds the negative narrative about BLK's credit franchises, then the market may begin to price in material portfolio losses and redemption risk.

Investor Confidence and Potential Redemption Scenario#

The most acute risk facing BLK in the near term is a loss of investor confidence that triggers redemptions from its private credit funds. Many institutional investors have committed capital to HPS-managed vehicles on the assumption that HPS possesses superior credit analysis, sourcing discipline, and risk management. That assumption is now openly questioned. If even a handful of large institutional investors (say, a sovereign wealth fund, a large pension plan, or an insurance company) decide that BLK's credit standards have deteriorated and choose to redeem their capital, the firm will face pressure to liquidate loans or sell assets at potentially unfavourable prices. Such forced liquidations would crystallise losses and reduce returns to remaining investors, potentially triggering a cascade of redemptions as other investors rush for the exits.

BLK's management has tools to mitigate this risk: restricting redemptions, extending lock-up periods, or offering discounted exits to ensure orderly liquidations. But the use of these tools signals distress and typically exacerbates investor anxiety rather than calming it. Alternatively, BLK could use its balance sheet or credit facilities to fund redemptions without forced asset sales, but this would consume capital that might otherwise be deployed to growth initiatives or returned to shareholders. Either way, a significant redemption scenario would materially constrain BLK's financial flexibility at a critical moment.

For GIP's infrastructure partnerships, redemption pressure on the credit side could delay or complicate deal closures for ACS and AES. If BLK is forced to redirect capital to fund redemptions or stabilise the credit franchises, the firm may lack the financial firepower to close large infrastructure deals on the timetable it has communicated to partners and co-investors. Deal delays or, worse, deal cancellations due to BLK's inability to deploy capital, would be deeply damaging to the firm's reputation with GIP partners and co-investors, and would likely result in competitive losses on future infrastructure opportunities.

Resolution and Long-Term Positioning#

The path forward for BLK depends on a combination of management action, regulatory outcomes, and asset owner forbearance. In the best case, management moves decisively to acknowledge the HPS fraud, implements comprehensive remediation (including personnel changes, process redesigns, and portfolio audits), and restores investor confidence that the credit franchise will be operated to higher standards going forward. If the DOJ investigation concludes that the fraud was primarily a borrower-side issue and that BLK's oversight, whilst imperfect, was not grossly negligent, the firm may be able to move past this episode with reputational damage but without catastrophic financial consequences.

In a more adverse scenario, the investigation expands to implicate BLK's own risk management functions, additional fraud is uncovered in the HPS portfolio, and asset owners lose confidence and initiate large-scale redemptions. In this case, BLK would face a prolonged period of portfolio stabilisation, capital deployment constraints, and competitive weakness in GIP. The infrastructure partnerships might proceed, but at more conservative return assumptions and with greater operational scrutiny from co-investors. The firm's diversification advantage would be undermined if both the credit and infrastructure franchises are simultaneously under pressure.

The firm's credibility with institutional clients—which is the ultimate source of BLK's economic moat and competitive advantage—now depends on transparency, speed of remediation, and demonstrated commitment to higher standards of financial discipline. Whether BLK can restore that credibility before the next earnings cycle will likely determine whether the stock moves higher or faces sustained downward pressure. The infrastructure thesis is compelling, but it cannot compensate for a loss of confidence in the firm's core operational and governance functions.