US private credit portfolios showed some signs of stabilisation in the second quarter, but lenders continued to reduce valuations on selected loans, particularly in the software sector, while the amount of debt no longer generating income increased, according to a report by Reuters.
The latest figures underline the pressure facing private credit following a difficult start to the year, as wider market spreads, weaker borrower performance and concerns around artificial intelligence disruption weigh on valuations.
A Reuters analysis of regulatory filings from 44 US business development companies (BDCs), which primarily provide financing to small and mid-sized businesses, found that the fair value of their portfolios remained below reported cost through the first half of 2026.
The 44 BDCs held investments with a combined fair value of $92.88bn at the end of June, compared with reported cost or amortised cost of $95.19bn. At the end of 2025, fair value stood at $95.82bn against cost of $96.54bn.
The aggregate fair-value-to-cost ratio fell from 99.25% at the end of 2025 to 97.77% in the first quarter before declining further to 97.57% in the second quarter.
The deterioration was significantly greater than normally seen over a six-month period, according to Chris Cessna, managing director at Houlihan Lokey’s Portfolio Valuation and Fund Advisory Services.
While the broadest valuation declines occurred during the first quarter, losses in the second quarter were more concentrated among individual borrowers.
Software has emerged as a particular area of concern for private credit lenders. Data cited by Cessna showed that BDCs had marked down 81% of their software loans during the year, compared with 40% of loans outside the sector.
Around 4% of borrowers had loans valued at less than 80% of par, up from approximately 1% annually between 2023 and 2025.
Several large BDCs reported that losses were concentrated among a relatively small number of investments.
Blue Owl Capital Corp said a credit-specific markdown on one investment was the main driver of its second-quarter decline in net asset value, compared with the first quarter, when broader spread widening accounted for roughly three-quarters of the decline.
At Ares Capital Corp, two software investments represented slightly more than one-third of its $527m of year-to-date net unrealised losses. Including five additional software companies pushed the proportion above half.
Golub Capital BDC reported that its losses were concentrated in a limited number of junior debt and equity investments, while FS KKR Capital Corp also said a small group of investments accounted for most of its markdowns.
