Highlights from the Business, Legal and Regulatory Perspectives BDC Forum Panel

At the 2025 Private Credit and BDC Forum in New York City presented by Dechert, Deloitte and Lincoln International, Dechert partner Harry Pangas moderated a discussion with leaders from Bain Capital, Barings, Dechert, Deutsche Bank and Stellus Capital on their latest takes on the estimated US$3 trillion private credit market and the BDC space. Read the key takeaways below.

State of the Private Credit Industry

The origins of the modern-day private credit industry trace to the Great Financial Recession and the actions taken by banking regulators in its aftermath to tighten lending standards and capital requirements on bank lending to middle market companies, including the issuance of the Interagency Guidance on Leveraged Lending by the FDIC and OCC. Recent estimates place the size of the private credit industry at between US$1.5 - US3.5 trillion, and institutional investors, such as insurance companies, endowments and pension funds, looking for higher returns drove the first leg of growth in the industry. The going-forward consensus is that high-net-worth individuals and retail investors will drive the next leg of growth in the private credit industry, and, as a result, the industry needs to dedicate significant resources to educating these investors about the benefits and risks of the asset class, including the general lack of a secondary market for many private credit investments.

Recent Headline Bankruptcies – Isolated Incidents or Harbingers

Although the widely reported bankruptcies of First Brands Group, LLC and Tricolor Holdings, LLC, including related allegations of fraud, are on investors’ minds and remain the focus of media attention, these failures actually involved broadly syndicated loans originated by banks and receivables “factoring” which were inaccurately attributed to private credit lenders. Other credit quality indicators for the private credit industry include somewhat elevated covenant default rates and increased loan amendment activity, but broad indications of stress are not evident across private credit portfolios.

Regulatory Environment

The regulatory environment for private credit in Washington, DC has become more friendly, including an executive order issued by President Trump in August 2025 directing federal agencies to facilitate access to “alternative assets,” such as private credit, in 401(k) plans. At the same time, there is caution due to recent interest by the Federal Reserve and other global regulators in the potential systematic and other risk posed by the private credit industry in light of its significant growth over the last several years.

“Retailization” of Private Credit

If the private credit space opens up to 401(k) plan investors as contemplated by President Trump’s August 2025 executive order, the industry will need to educate investors and their financial advisors on the asset class and how it fits with their investment goals and risk tolerances. Publicly traded BDCs, target date funds and interval funds and other semi-liquid funds may be best suited for 401(k) plan investors and other product/fund innovations will likely occur to meet the needs of this new source of capital for the private credit industry.

PIK

Payment-in-kind instruments (PIK) generally result in interest or dividends being paid in additional securities or an increase in the principal amount outstanding, rather than cash. There is a distinction between PIK provisions offered at the outset of an investment transaction to win deals versus PIK provisions negotiated in the face of deteriorating fundamentals of the borrower. An increase in the level of the latter type of PIK provisions has been observed, but these types of PIK provisions can also be a useful tool in providing borrowers with more runway to get their house in order and ultimately result in more sound borrowers down the road.

M&A Activity in the Private Credit Industry

There are two main types of M&A activity happening in the private credit space - one at the manager level and the other at the BDC level. Manager-level M&A activity has been the most vibrant and is driven by managers with strong track records of managing multiple vehicles (BDCs, co-mingled funds, SMAs, etc.) often across multiple verticals (sponsor-backed, asset-based finance, etc.) selling to larger traditional managers looking to diversify their businesses.

The BDC-level M&A deals have come in two flavors: (i) the “need to transact” flavor or (ii) the “affiliated BDC” flavor. The “need to transact” flavor is driven by:

• the inability of the target BDC to raise capital due to poor performance and/or internal resources; or
• capital structure issues, including the equity investors of the target BDC desiring liquidity for their investment.

With respect to the “affiliated BDC” flavor, these transactions have included the target BDC selling assets to an affiliated “perpetual” BDC and either cashing out the target BDC’s shareholders or merging the cash-only target BDC into another BDC/registered closed-end fund.

Acquired Fund Fees and Expenses

A bill passed by the House of Representatives exempts index mutual funds and other 1940 Act–regulated funds that invest in BDCs from including the “acquired fund fees and expenses” (AFFE) calculation relating to their BDC investments in the fee table contained in their SEC prospectuses. There is hope that changes will eventually be made to the AFFE disclosure requirements, either through the passage of legislation by Congress or rulemaking by the SEC, to correct the 2014 booting of listed BDCs from the major stock indices.  Even if that happens, the BDC industry will also need to lobby the index providers to make sure they are welcomed back into the major indices.

BDC Tax Parity

The BDC industry is also lobbying Congress to provide investors in BDCs with the same tax advantage currently enjoyed by investors in real estate investment trusts (REITs). Specifically, the proposed legislation would permit eligible taxpayers to take a 20% deduction on qualified dividend interest income received on their investments in BDCs. This proposed legislation could provide additional financial incentives for investors to invest in BDCs.

Exxon Mobil No-Action Letter

A recent no-action letter issued by the SEC’s Division of Corporation Finance allows retail investors to give a standing voting instruction to a public company to vote their shares in accordance with the recommendations of the public company’s board of directors on either (i) all matters or (ii) all matters except contested director elections and certain M&A transactions. Various parties are seeking similar no-action relief from the SEC’s Division of Investment Management on behalf of BDCs and other 1940 Act–regulated funds and, if granted, this no-action relief would be welcomed by the industry as a means to reduce proxy solicitation costs and, potentially, timelines.

State Securities Guidelines

Non-traded publicly offered BDCs are subject to state securities regulation, and state regulators look to the North American Securities Administrators Association’s Omnibus Guidelines (NASAA Guidelines) to guide their comments on filings by non-traded publicly offered BDCs. Although not directly applicable to non-traded publicly offered BDCs, the set of NASAA Guidelines specific to non-traded publicly offered REITs were updated in September 2025 to, among other things, (1) change the minimum income and net worth requirements for REIT investors and (2) implement a uniform concentration limit that restricts investment in direct participation programs (including REITs and BDCs) to 10% of an investor’s liquid net worth (with a general carve-out for accredited investors, subject to state discretion). Certain states apply the REIT Guidelines to securities offerings by non-traded publicly offered BDCs only where the NASAA Guidelines for BDCs are silent and there is hope that state securities regulators will take the same approach going forward with the revised REIT Guidelines.

Maturity Wall for BDC Bonds

In 2020 and 2021, BDCs hit the bond markets in record numbers and raised large sums of debt to lock in low interest rates for a five- to six-year period. A large portion of such maturing BDC bonds was successfully refinanced in 2025 and the remainder is expected to be refinanced in due course in 2026 given continued strong investor appetite for BDC bonds.

Predictions

Predictions about significant events or trends that would impact the private credit/BDC industry in the coming year include:

1. greater scrutiny of valuations and valuation practices;
2. innovation in the BDC space to make them more friendly for wire houses, including the potential for a BDC interval fund;
3. increased M&A activity at the manager level by traditional managers seeking to enter the growing private credit space by acquiring “top-notch” private credit managers and private credit managers looking to cash out at an opportune time; and
4. continued vibrancy in the BDC debt capital markets as BDCs seek to refinance their maturing debt and finance their businesses with new debt.