Business development companies (BDCs) are dealing with numerous headwinds, from increases in redemptions to concerns around credit quality, but behind the headlines, analysts see a more positive environment for these vehicles.
Both listed and non-traded BDCs have had a tough time as a reduction in interest rates is impacting sentiment around private credit. Some of the returns are not helping either. The Cliffwater BDC Index is down 4.29 per cent over one year and according to a recent Raymond James publication, out of 46 publicly traded BDCs, 30 had a negative total return over the last 12 months.
Some of the worst performers were OFS Capital Corporation, down 27.1 per cent, FS KKR Capital Corporation, which was down 21.7 per cent and Gladstone Capital Corporation, down 20.8 per cent.
Read more: Blue Owl gates retail private credit fund amid redemption pressure
FS KKR Capital Corp has had widely publicised issues around high non-accruals, leading to concerns around portfolio quality. In its most recent earnings call, chairman and chief executive Michael Forman said that although industry observers are predicting difficult times ahead for BDCs, as interest rates decline, that should help portfolio companies and generate additional M&A activity.
“We also believe that while net investment income levels necessarily will decline from the recent highs, FSK in particular, and the BDC industry in general, are well positioned to continue providing investors with an attractive current income stream as compared to the risk-free rate,” he added.
On top of the struggles with performance, many listed BDCs are trading on discounts to their NAVs.
With the challenges for listed BDCs coming under the spotlight, non-traded BDCs are being favoured more and more by investors.
The 163 BDCs that are tracked by Solve reached $500bn (£369.6bn) in assets for the first time last year, with majority of the flows now going into private non-traded vehicles. About $350bn of the AUM was in private BDCs in 2025.
According to Evan Gunter, lead research analyst for private markets analytics at S&P, publicly traded BDCs grew about six per cent over the year, while non-traded BDCs grew about 51 per cent.
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In terms of performance, non-traded BDCs are generally offering yields of between eight and 10 per cent.
The growth comes despite an increase in outflows, that has seen investors redeem 17 per cent from the Blue Owl Technology Income Corporation; 4.5 per cent from the Blackstone Private Credit fund in the third quarter of last year; and 5.6 per cent from the Ares Strategic Income Corporation.
However, BDC managers remain bullish.
Speaking to Bloomberg, Blue Owl co-founder Craig Packer said the fund has $2.4bn of liquidity, meaning they were able to meet redemptions as requested by investors and did not need to implement a cap.
[Editor’s note: This article was written before it emerged that Blue Owl had gated Blue Owl Capital Corporation II.]
In a letter to investors, Blackstone noted that capital inflows for the fourth quarter were $3.3bn, taking full year fundraising to $14.5bn. It added that it will honour all repurchases, highlighting the funds 9.6 per cent annualised distribution rate and 10 per cent annualised inception to date total return.
Speaking at the Goldman Sachs Financial Services Conference, Blackstone president Jon Gray said: “Whenever you get a lot of negative headlines, particularly among the individual investors, you can see a shift in sentiment.”
But he added that investors continue to recognise the premium private credit can offer.
Silver linings
Despite these issues, some BDCs are still faring well in the current market. Trinity Capital, Capital Southwest Corporation and Gladstone Investment Corporation are the top three performers over the last 12 months, returning 28.8 per cent, 20.9 per cent and 20 per cent, respectively.
Meanwhile, Ares Strategic Income fund saw $976m in inflows in the fourth quarter, with chief executive Michael Arougheti saying he “remains confident in the long-term growth” of their wealth business.
Furthermore, despite macro uncertainty and concerns about borrower stress following the First Brands saga, underlying credit performance has remained relatively resilient.
Read more: Partners Group launches new BDC to target US private credit
“Over half of the loans that are held by BDCs are from borrowers that we believe we have a credit estimate on,” Gunter explained, for which the default rate fell to about 4.6 per cent, down from 5.3 per cent, last year.
Payment-in-kind (PIK) usage, often seen as a warning sign, has also started to decline. “The percentage of the loan portfolio that we estimate was making PIK loans fell to 12.8 per cent in the second quarter of 2025, down from just over 13 per cent at the beginning of the year,” Gunter said. “This could suggest that cash pressures on BDCs are starting to ease somewhat with lower benchmark interest rates.”
Solve’s data also supports this. New investments featuring PIK structures fell to 9.17 per cent in the third quarter of 2025, down from the highs seen in 2023 and 2024, as spreads also continued to compress across first-lien, second-lien and unitranche loans.
At the portfolio level, valuations remain healthy with Solve data showing that 92.57 per cent of their portfolios are marked above 90.
Bigger deals, broader portfolios
As BDCs attract more capital, they go after larger deals and as a result start investing in many of the same deals. Sourav Srimal, chief growth officer at Solve, highlights 15 portfolio companies that show up on a number of BDC portfolios, with the aggregate debt investment made going above $1bn.
These include companies like Zendesk, eResearch Technology and IRI Group Holdings.
However, concentration risk appears to be easing. “Right now, the BDCs top 10 investment on an aggregate level is 30 per cent of the total portfolio,” he said, “but if you look at the trend, it is going down…this is a good indication that they are spending some time on diversification.”
Regulatory support
Last year, the US Securities and Exchange Commission implemented several measures to make it easier for BDCs to raise capital, such as allowing multiple share classes with varying fees and granting co-investment relief.
And in January, the House passed the Incentivizing New Ventures and Economic Strength Through Capital Formation Act, which allows registered investment companies to exclude fees and expenses incurred indirectly from BDC investments.
Brian Hirshberg, partner at Mayer Brown in the capital markets team, said that the reforms “would be a very significant positive for BDCs.”
