Don’t Believe the Headlines: A Defense of BDCs and Private Credit

Recent headlines have not been kind to business development companies (BDCs) investing in private credit. Fears of weakness in the software sector driven by advances in artificial intelligence as well as withdrawal limits and so-called redemption "gates" have generated a wave of coverage suggesting that the entire private credit industry structure is broken.

What these headlines fail to address, however, is that BDCs are structured for long-term investment, where investors rely on income generated from the asset portfolio, and not redemptions with investors typically receiving higher income rates in exchange for this relative illiquidity. Their credit quality is based on the diversity of the asset pool and the performance of such assets. Not only are BDCs subject to diversification requirements, their assets also show a broad diversity in both asset classes and industries.

Fears as to such performance may in fact be overblown, especially when considering that many of these assets are senior secured debt, and thus take first priority in any restructuring or bankruptcy scenario. Well-managed BDCs will always strive to improve their portfolio, regardless of the state of the market, as they look to maximize returns on an ongoing, sustained basis.

The Numbers Do Not Add Up

The size of the private credit market for 2025 was approximately US$2.3 trillion.¹ Applying the worst figures from the global financial crisis conditions of 2008 (including a roughly 13% default rate² and a 53.6% recovery rate for first lien bank loans)³ leads to losses at around US$138.7 billion. While certainly a large amount, it calculates to only 6% of the total size of the assets. Compare this to stocks, where there have been 10% market corrections every 2.2 years.⁴ More importantly, we are far from peak 2008-era default conditions, and thus realized losses should be expected to be far less.

For BDCs investing in private credit, the core asset pool consists of directly originated, senior secured loans. The historical data shows that these loans are at low risk of default; in 2025, the Cliffwater Direct Lending Index estimated realized losses for the underlying loans of all BDCs at 0.70% for calendar year 2025, below the 1.01% annual historical loss rate for private debt.⁵ JPMorgan, calling the recent spate of elevated redemption requests "driven more by sentiment than by fundamentals," notes that, as of mid-March 2026, B-rated leveraged loan returns (JLPXB Index) are down only around 2.6% year-to-date; default rates continue to track at or below historical averages across credit markets; and for non-traded BDCs, non-accruals have held at approximately 1.2% (of cost), below the 10-year average of 1.9%.⁶

Underlying Assets Are Safer Investments

The calculations above focus on first lien debt. This focus is intentional; BDCs typically invest heavily in senior secured debt,⁷ and thus will be the first in line for any recovery. Admittedly, credit cycles and stress can and will impact all sectors of finance. However, according to Moody's historical recovery rate data, senior secured loans have consistently recovered 60% or more of the debt’s face value in default scenarios, compared to roughly 40-50% for senior unsecured debt and even lower for equity.⁸ Even during the global financial crisis, widely regarded as the worst credit event since the Great Depression, senior secured loan recovery rates held at approximately 55-70 cents on the dollar for bankruptcies and payment defaults.⁹

Investors in BDCs are holding senior secured obligations with a demonstrated track record of low losses and meaningful recoveries even when things go awry. In fact, it is the equity investors that will face the most potential loss, whereas the senior secured creditor will face the least.

BDCs’ Diverse Portfolio Designed to Weather the Storm

Portfolio diversification is a well-established principle in finance. BDCs are subject to quarterly diversification tests in order to maintain regulated investment company (RIC) status for tax purposes. For industry diversity, in 2025, BDCs invested across industries, including in the healthcare, technology, consumer, industrials, business services, software, real estate, energy and financial services industries, among others.¹⁰ Just like any investment portfolio, not all assets will succeed. However, the broad exposure to different markets that BDCs enjoy help mitigate the risks.

The sector receiving the most amount of press recently is, of course, artificial intelligence (AI), with the argument that software company business models are threatened by AI reducing barriers to entry and enabling customers to build their own software instead of outsourcing. It is true that many BDCs have material exposure to software companies, with Octus recently reporting that software made up almost 30% of investment cost and fair value on average across public and private BDCs’ portfolios.¹²

The fears again belie the facts. Software assets in BDC portfolios have historically generated lower loss rates than average across all sectors, with about 50 basis points of non-accruals in software compared to about 135 basis points across all sectors.¹³

While AI certainly has the potential to disrupt the software market generally, the type of software company in which the BDC invests has a significant impact. BDCs are aware of the fears surrounding AI, and those that evolve their investment strategies with the changing times (e.g., investing in companies with deep domain expertise and embedded platforms) are best suited to both mitigate the risk of internal production and provide even more opportunities to such companies with the advent and proliferation of AI. In addition, as noted above, BDC investments in the software industry are typically in first lien senior secured loans, which are first in line for repayment in any recovery, in front of any equity, and are scheduled for repayment over a defined time horizon. Finally, AI actually helps asset managers, and can be used to improve underwriting, portfolio monitoring, reporting and data management. AI is a tool, and whether asset managers can successfully utilize that tool will determine their outcomes. This risk, however, is not specific to BDCs or private credit, and applies to investments in general.

Income, Not Redemptions, Is the Main Source of Investor Returns

It is no surprise to investors of BDCs that their private credit assets have limited liquidity; this fact is prominently disclosed to investors in the typical registration statement or other offering document and is, in fact, a feature of the investment. Perhaps the most important engine of investor returns for BDCs is income. BDCs lend to middle-market companies at relatively high interest rates, which in turn supports high cash distributions to investors, especially when coupled with regulatory requirements that require BDCs to distribute at least 90% of their investment income to maintain pass-through tax status (and 98% to avoid excise tax). In all markets, investors continue to receive distributions regularly from interest income generated by the BDC's underlying private credit assets. Notably, the top BDCs had historical dividend yields greater than 12% as of Q3 2025.¹⁴

This leads into the primary reason why BDCs often cap redemptions, commonly at 5% quarterly. Since many BDCs are semi-liquid, the sheer number of redemption requests recently would require the funds to sell assets which such selling likely to occur at a potentially deep discount to the value ultimately expected to be received on the investment. While the redeeming investors would be able to exit their investments with cash in hand, this would cripple the ability of the BDC to continue providing investment income to the remaining investors, thus defeating the purpose of the BDC itself. Limits on repurchases protect the many from the panic of the few, permitting the BDC to continue its open-ended life and allow its investors to continue receiving higher ongoing income in the structure that such investors were fully aware of at the time of their investment.

Conclusion

We have seen this before. Some analysts predict that the private credit BDC space will experience a dynamic similar to what non-traded real estate investment trusts (REITs) went through in 2022 and 2023, where redemption requests escalated as fundraising contracted. Nearly three years later, non-traded REITs have bounced back significantly.¹⁵ These funds did not collapse; they stabilized, performed and re-attracted capital.

Despite the headlines, BDCs and private credit in general remain a strong investment option for investors looking for an income-producing asset and a balance between fully illiquid private funds (with no redemption rights at all) and fully liquid public markets (where returns may be lower in order to maintain daily liquidity). These funds were built for the long term, not the news cycle.