Private credit appears to have avoided the worst-case outcomes feared earlier this year, with Q2 results from major business development companies (BDCs) pointing to a more stable market environment despite continued pressure on valuations and credit quality, according to a report by Bloomberg.
The $1.8tn private credit market came under intense scrutiny during the first half of 2026 amid rising redemption requests, weaker portfolio performance and concerns over exposure to businesses vulnerable to artificial intelligence disruption.
However, results from publicly traded BDCs are suggesting that conditions have begun to stabilise. Managers including Ares Management, Blue Owl Capital and BlackRock have been taking steps to strengthen portfolios, including reducing leverage, addressing troubled investments and limiting non-accruals.
The improvement has also been reflected in BDC share prices, many of which fell to multi-year lows earlier this year.
Blue Owl co-president and head of credit Craig Packer said the second quarter had been “much more stable” than the first, adding that the investment environment had improved significantly since the beginning of the year.
Nevertheless, the recovery remains uneven and there is little evidence yet of a broad return to aggressive growth in traditional direct lending. Some large private credit managers are instead shifting towards higher-rated borrowers and larger financings, including debt supporting the build-out of artificial intelligence infrastructure.
Ares Capital, the largest publicly traded BDC, saw loans on non-accrual status rise 15% quarter-on-quarter to $708m at the end of the second quarter. That represented approximately 2.4% of the portfolio at cost, still below the company’s historical average of around 3% since the global financial crisis.
Ares maintained its quarterly dividend at 48 cents per share.
Blackstone Secured Lending Fund, meanwhile, recorded its largest quarterly decline in net asset value in six years. NAV fell to $25.53 per share, with the manager attributing the decline primarily to portfolio markdowns rather than a significant increase in non-performing loans.
The fund recorded $137m of unrealised losses and approximately $28m of realised losses linked to two restructurings. The bottom 10% of the portfolio was valued at 70 cents on the dollar, compared with 73 cents in the previous quarter.
BlackRock’s TCP Capital took a more significant step to address portfolio pressures, agreeing to transfer 48% of its loan portfolio into a continuation vehicle backed by secondaries investor Pantheon.
The vehicle will hold $523m of investments across 78 companies, with TCPC retaining a 5% equity interest. The transaction is expected to reduce the fund’s NAV by approximately 10.4%.
The BDC’s board has also appointed Keefe, Bruyette & Woods to examine strategic alternatives, including potential asset sales or combinations.
Blue Owl continued to support its publicly traded credit vehicles through share repurchases, with two BDCs buying back a combined $90m of stock during the quarter.
Blue Owl Capital Corp’s NAV declined 1% to $14.26 per share. Non-accruals increased to 2.8% of the portfolio at cost from 2% in the previous quarter.
The fund recorded $747m of repayments against just $319m of new commitments, illustrating the subdued level of new direct lending activity.
Its technology-focused Blue Owl Technology Finance vehicle reported broadly stable NAV and repurchased approximately $55m of shares.
Elsewhere, Goldman Sachs’ BDC reported a decline in NAV to $12.06 per share, while non-accruals rose to 5% of the portfolio at cost from 4.7%.
Net investment income increased 70% from the first quarter to $42.2m, although it was slightly below the level recorded a year earlier.
FS KKR Capital offered a more positive signal. The $11.4bn BDC, managed by KKR and FS Investments, reduced non-accruals to 3.8% of the portfolio at fair value from 4.2% three months earlier.
The improvement follows KKR’s decision earlier this year to inject $300m into the vehicle and launch a share repurchase programme. Quarterly losses narrowed substantially to 13 cents per share, compared with a $1.57 loss in the previous quarter.
Other managers also reported mixed but generally less severe deterioration.
Oaktree Specialty Lending reduced the number of investments on non-accrual from 10 to six. Those assets represented 4.2% of the portfolio at cost, down from 5.9% previously.
Apollo-backed MidCap Financial Investment reported non-accruals falling to approximately 4.6% from 5.3%, while net investment income exceeded analyst expectations.
Morgan Stanley Direct Lending Fund, however, saw NAV fall to $19.50 per share from $19.81, while the number of portfolio companies on non-accrual increased to seven from six.
Carlyle Secured Lending’s NAV declined 1.8% to $15.61 per share, although the fund maintained its dividend at 35 cents following a reduction earlier in the year.
Sixth Street Specialty Lending also held its dividend steady after cutting the payout in the previous quarter.
Taken together, the results suggest that private credit has moved away from the most severe stress scenarios feared at the start of the year, but the sector is not yet back to normal.
The continuing pressure on valuations, uneven credit performance and subdued new loan origination point to a market undergoing a period of adjustment rather than a full recovery.
At the same time, the pipeline of large private credit transactions remains active. Ares is leading a $2.2bn direct loan for a healthcare services acquisition, while private lenders are also providing financing for deals involving KKR, Toscafund and other private equity sponsors.
