Publicly traded private credit vehicles are on track for their weakest year relative to US equities since 2020, raising questions among investors about the long-term role of business development companies (BDCs) in the $1.7tn private credit market, according to a report by Bloomberg.
The Cliffwater BDC Index, which tracks 41 publicly listed vehicles focused on direct lending, was down approximately 6.6 per cent through 24 December, significantly underperforming the S&P 500’s roughly 18.1 per cent gain over the same period. The contrast marks a sharp reversal from the strong performance recorded in 2023 and 2024, when the index returned 25.4 per cent and 14.1 per cent, respectively.
BDCs have been hit by a combination of interest rate cuts, market volatility and growing concerns that stress in the private credit market may intensify. Deal activity has slowed, forcing lenders to accept tighter spreads and reducing earnings potential across portfolios. As private credit strategies expand into larger, more investment-grade opportunities, including AI infrastructure financing, investors are reassessing whether publicly traded vehicles still offer the best risk-adjusted exposure.
Large managers including Blue Owl Capital, Ares Management and Blackstone have sought to reassure investors that portfolio fundamentals remain intact and that share price declines reflect broader credit market dislocations rather than deteriorating asset quality. Defaults have so far remained contained, but the equity market sell-off has constrained strategic flexibility. Blue Owl recently abandoned plans to merge one of its private funds into its listed vehicle after concerns emerged over dilution while the shares traded at a steep discount to net asset value.
By contrast, fundraising for non-traded private credit vehicles has remained resilient. Blackstone’s non-traded private credit fund raised $2.8bn of net new equity in the third quarter, while Blue Owl’s comparable vehicle attracted $1.9bn, according to Moody’s Ratings. However, redemption requests have also increased at some of the largest funds, reflecting heightened investor caution.
With the Federal Reserve expected to continue cutting rates in 2026, margin pressure is likely to persist. Average spreads on private credit deals have narrowed to below 500 basis points over base rates, down from around 650 basis points in early 2023, compressing returns and challenging the long-held perception of direct lending as a consistent double-digit asset class.
As sentiment toward BDCs softens, private credit managers are increasingly turning to alternative fund structures such as interval funds, which offer periodic liquidity while avoiding public market volatility. These vehicles also provide greater flexibility to invest across a broader range of private credit strategies, including asset-backed finance and investment-grade lending.
Meanwhile, listed BDCs have drawn growing interest from short sellers. Short interest across the sector rose sharply in 2025 as investors positioned for further signs of stress, including rising use of payment-in-kind interest and an increase in loans placed on non-accrual status.
