Warning: Publicly Traded Credit Funds Lose Money
The Struggles of Publicly Traded BDCs
Publicly traded business development companies (BDCs), which form a significant part of the private credit market, are facing unprecedented challenges. A recent analysis reveals that the majority of these companies have turned unprofitable due to declining asset values and increasing operational costs. This marks a troubling trend in a sector that has long been considered a crucial source of capital for mid-sized businesses.
The $3.5 trillion private credit industry has seen increased pressure, partly due to its exposure to software companies affected by advancements in artificial intelligence. BDCs operate as investment loan vehicles, generating revenue through interest payments on loans extended to borrowers. However, the current economic climate is causing a shift in their financial performance.
Analysis of BDC Performance
An analysis conducted using balance sheet data from S&P Global Market Intelligence examined 53 publicly traded BDCs. The findings indicate that loan losses and debt costs have risen significantly. Additionally, some BDCs are utilizing more off-balance-sheet borrowing, which adds complexity to their financial reporting.
Companies in this industry typically assess their performance based on net investment income, which does not account for changes in underlying loan values. However, S&P’s data platform standardizes net profit figures across all BDCs, incorporating debt costs and changes in loan values. This approach provides a more accurate picture of their overall financial health.
According to S&P’s data, the group was unprofitable for the first time since at least 2024, largely due to writedowns on the value of their assets, such as loans to software companies. The average profits for the group fell to negative $7.6 million in the first quarter of 2026, down from $26 million a year earlier.
Increasing Loss-Making BDCs
The S&P analysis shows that 28 out of the 53 BDCs were loss-making, compared to 12 a year ago and 10 in 2024. These figures, reviewed and affirmed by three academics, two industry analysts, and S&P itself, highlight growing concerns about the health of this market. Regulators are also watching closely, as the situation could have broader implications for the financial sector.
Leyla Kunimoto, founder of Accredited Investor Insights, noted that this trend indicates fund managers are marking assets down more widely than seen in previous cycles. “This will translate into lower returns for investors,” she said. Kunimoto, who is also a private credit investor, emphasized that the entire universe is now re-valuing their loans.
Jiří Król, global head of the Alternative Credit Council, highlighted the importance of BDCs in providing capital for middle-market businesses. He pointed out that investors benefit from standardized and transparent reporting, particularly around portfolio assets, valuation, leverage, and performance. This transparency is often higher than that of bank balance sheets.
Shadow Borrowing and Financial Risks
BDCs’ interest expense has increased by a fifth over the past two years, rising from an average of around $23 million to roughly $28 million. These funds have also borrowed more through payment-in-kind (PIK) arrangements, which add debt to the balance sheet while counting interest as income.
Steve Novakovic, managing director of Educational Programs at the CAIA Association, explained that PIK income, while potentially beneficial for investors, is non-cash and can signal eroding credit quality. According to Fitch Ratings, PIK income accounted for 8.1% of BDCs’ interest and dividend income on average in 2025, up from 7.7% in 2024 and double pre-2020 levels.
BDCs maintain financial stability by borrowing off-balance sheet via special purpose vehicles and joint ventures. This borrowing is not included in regulatory safety metrics. An analysis of earnings reports found that only 14 BDCs published complete data on their joint ventures, with off-balance sheet borrowing rising sharply.
When adding this extra borrowing back onto BDC balance sheets, overall borrowing at the 14 BDCs grew by 80% over the entire year of 2025 and a further 14% in the first quarter of 2026.
Asset Markdowns and Performance Decline
Some funds have marked down existing loans. For example, Blue Owl’s OTF fund took a markdown of $490 million in the first quarter, the highest amount since the fund was created. It also recorded a $100 million realized gain on investments.
FS KKR reported realized losses of $195 million in the first quarter, the highest since 2024 and its second-highest ever. Crescent Capital BDC booked over $12 million in losses during that time period, its highest since 2020.
The S&P BDC index <.SPBDCUT> is down 8.4% since the start of 2026, while the S&P 500 has climbed nearly 9%. Despite these challenges, the companies declined to comment on the situation.
