By Nell Mackenzie and Iain Withers
LONDON, July 1 (Reuters) - The majority of publicly traded business development companies (BDCs) — the visible part of the private credit market — have turned unprofitable due to falling asset values and rising costs, a Reuters analysis shows, in the latest sign of pressure building in this highly leveraged corner of finance.
The $3.5 trillion private credit industry, where specialist funds step into a role traditionally held by banks to lend to mid-sized companies,
has lately come under stress due in part to its sizeable exposure to software companies disrupted by AI advances. BDCs are investment loan vehicles that make money by collecting interest payments on credit extended to borrowers.
A Reuters analysis of balance sheet data from S&P Global Market Intelligence examined 53 publicly traded BDCs, finding that their loan losses and debt costs have jumped. A number of those BDCs are also utilizing more off-balance-sheet borrowing.
Companies in this industry tend to be appraised based on the health of their net investment income, which excludes changes in underlying loan values.
However, S&P's data platform standardizes net profit figures across all BDCs to arrive at a bottom-line income figure that adds in debt costs and changes in loan values, using figures either from a third party appraisal company or by the BDC's fund manager.
Using that data, the group was unprofitable for the first time since at least 2024, largely due to writedowns on the value of their assets, such as loans to software companies.
Across the group collectively, average profits fell to negative $7.6 million in the first quarter of 2026 from $26 million a year earlier, S&P Global numbers showed.
S&P's metric shows that 28 of these 53 BDCs were loss-making, compared with 12 a year ago and 10 in 2024, according to Reuters calculations, which were reviewed and affirmed by three academics, two industry analysts, and S&P itself.
While that does not change the calculation of how the companies report their results, the S&P analysis underscores concerns about the health of this market, which is already worrying regulators.
"It is a sign. Fund managers are marking assets down more widely than we've seen in this cycle," said Leyla Kunimoto, founder of Accredited Investor Insights, an analyst website, who reviewed the Reuters analysis. "This will translate into lower returns for investors."
"This tells us that the entire universe is now re-valuing their loans," said Kunimoto, who is also a private credit investor.
Jiří Król, global head of the Alternative Credit Council, said BDCs are important in providing capital for middle-market businesses to grow.
"Investors in BDCs benefit from standardised and transparent reporting, particularly around portfolio assets, valuation, leverage and performance," he said. "This transparency is much higher than that of bank balance sheets."
SHADOW BORROWING
BDCs' interest expense has crept up by a fifth in the past two years, from an average of around $23 million to roughly $28 million, S&P data shows.
These funds have also borrowed more in ways that boost income and cash levels. Borrowing by BDCs, known as payment-in-kind (PIK), adds debt to the balance sheet while its interest is counted as income.
"While PIK income may ultimately be earned by investors, it is non-cash income and can be an early indicator of eroding credit quality," said Steve Novakovic, managing director of Educational Programs at the CAIA Association, a professional accreditation for studies in alternative investments, who also reviewed the Reuters analysis.
PIK income accounted for 8.1% of BDCs' interest and dividend income on average in 2025, up from 7.7% in 2024 and double pre-2020 levels, according to Fitch Ratings.
BDCs maintain financial stability by borrowing off balance sheet via special purpose vehicles and joint ventures. This borrowing is not counted towards regulatory-required safety metrics.
A Reuters analysis of the group's earnings reports using AlphaSense's financial data platform found that only 14 BDCs published complete data on their joint ventures. At those funds, off-balance sheet borrowing rose sharply.
While there is no suggestion that regulatory rules have been broken, these filings involve complicated debt structuring which sometimes means the funds do not have to disclose information.
When adding the extra borrowing back onto BDC balance sheets, overall borrowing at the 14 BDCs grew by 80% over the entire year of 2025 and a further 14% in the first quarter of 2026, according to Reuters calculations.
MARKDOWNS
Some funds have marked down existing loans. Blue Owl's OTF fund took a markdown of $490 million in the first quarter, the highest amount since the fund was created. It also recorded a $100 million realised gain on investments.
FS KKR reported realised losses of $195 million in the first quarter, highest since 2024 and its second-highest ever, while Crescent Capital BDC booked over $12 million in losses during that time period, its highest since 2020, S&P data showed.
The S&P BDC index <.SPBDCUT> is down 8.4% since the start of 2026, while the S&P 500 has climbed nearly 9%.
The companies declined to comment.
(Reporting by Nell Mackenzie and Iain Withers; Editing by Elisa Martinuzzi, Dhara Ranasinghe, Tommy Reggiori Wilkes and David Gaffen)
