This report does not constitute a rating action.

Private credit's growth has largely been fueled by institutional investors, as pension and endowment funds have turned to this asset class with its typically and historically higher yields. Yet retail investors have also powered an integral part of private credit's growth and maturation that largely resulted from U.S. market participants' allocations to BDCs.

As a unique feature exclusive to the U.S. loan market since the 1980s, BDCs have served as a key arena for private funding to solidify and expand its foundation across global markets. Over the past four decades, BDCs have evolved, as demand for these investment vehicles has increased in tandem with activity in private debt markets--from providing funding to small and midsize enterprises (SMEs) largely unable to source credit from the bond or broadly syndicated loan (BSL) markets to encompassing $440 billion in assets as of year-end 2024.

S&P Global Ratings publicly rates 16 BDCs that include roughly 145 funds and that held approximately $235 billion in total assets as of year-end 2024. These BDCs represent more than 50% of the market on a dollar basis. Most BDCs within our public portfolio are rated at 'BBB-' with stable outlooks.

Despite, or perhaps because, of recent market volatility, investor sentiment appears bullish on private credit, as viewpoints in favor of the asset class often cite lower volatility. We expect increasing investor appetite for private credit instruments will continue supporting a further expansion of the BDC market. Yet the higher and direct returns that investors can generate in private markets can also come at a cost: The same illiquidity that drives a return premium for investors can prove burdensome in periods of stress.

Our outlook for the performance of the private credit market, including BDCs, mirrors our outlook for the broader credit market--because credit is credit, whether it is public or private. SMEs may face more pressure navigating the ongoing uncertainty disrupting markets than larger corporates. However, several mid-market entities that BDCs lend to may be more insulated from the first-order effects of tariffs, given their domestic focus. That said, the second-order effects of tariffs on GDP growth, unemployment rates, public consumption, and inflation may be more widespread.

BDCs will likely be conservative in their capital deployment in times of heightened uncertainty and are also likely to be affected by the rising risk of recession in the U.S. These investment vehicles cannot readily rotate portfolios to sectors less affected by tariffs. Similar to other lenders, however, BDCs with diversified portfolios and high-quality, longer-term funding with robust risk controls and valuation processes are likely to fare better than those without such features.

In this credit FAQ, we answer frequently asked questions about BDCs in private credit and middle-market financing. We trace the transformation of the industry and the change in investor profiles, examine different funding sources and features, explain our analytical approach to rating these investment vehicles, and highlight potential risks and opportunities that are shaped by complex macroeconomic conditions.

Frequently Asked Questions

How has the evolution of the BDC market and its key players shaped private credit?

Created in response to the Small Business Investment Incentive Act of 1980 (through an amendment to the 1940 Investment Company Act) that was aimed at providing capital and support to SMEs, BDCs stimulated the growth and creation of the U.S. venture capital industry.

This regulation mandates to date that 70% of BDC investment assets must comprise securities purchased in non-public transactions from eligible portfolio companies, their affiliates, treasuries, and high-quality liquid securities. Additionally, the Act requires BDCs to provide significant managerial and operational assistance to these eligible companies. Most BDCs also elect to be treated as regulated investment companies and must distribute at least 90% of their income to shareholders.

In 2013, leveraged lending guidance from U.S. bank regulators enforced more consistency in definitions and limits--which consequently pushed more leveraged lending outside of the traditional banking industry and toward nonbanks, including BDCs. This amendment was made to increase capital and flexibility for BDCs, helped boost capital formation, and benefited small and emerging businesses through the investment and managerial support provided by BDCs.

The Small Business Credit Availability Act of 2018 further relaxed existing leverage limits, allowing BDCs to use up to a 2:1 debt-to-equity ratio on their balance sheets. This meant that, overall, BDCs could take on more leveraged lending, demand for which was rising across the market. This enabled the BDC market to flourish and led to an aggregate asset portfolio of $440 billion at year-end 2024. Having nearly doubled since year-end 2021, the size of the market has grown to more than 140 BDCs.

As an asset class, private credit has become increasingly important to global investors. The entrance of large investors--such as insurance companies, pension funds, and other real money institutional investors--has added scale to private credit lending. Retail investors have also been a long-standing player in private credit through the publicly traded BDC market.

BDCs have proven to be a tax-efficient entry point to private credit. While investors in non-traded BDCs sacrifice liquidity, they benefit from reduced volatility in their portfolios, alongside enhanced returns, for the same type of exposure. This has attracted an increasing number of high-net-worth investors and institutions alike.

Chart 1

Chart 2

How do you rate BDCs?

Credit ratings are forward-looking opinions about an issuer's relative creditworthiness. They provide a common and transparent global language for investors and compare the relative likelihood of whether an issuer may repay its debt on time and in full. Our credit ratings are designed to provide relative rankings of credit quality and risk and we assign them based on our methodologies.

We rate BDCs using our financial institutions framework. Similar to our approach to other nonbank credit providers that fall into the scope of our "Financial Institutions Rating Methodology," published Dec. 9, 2021, the starting point for our assessment is a 'bb+' anchor.

Among others, this reflects BDCs' exposure to common economic features and higher competitive and funding risks compared with banks. Risks that nonbank credit providers, such as BDCs, face relative to traditional lenders include reduced regulatory oversight, lack of access to central banks, and investments in assets that may be riskier than those banks usually invest in.

We also consider additional factors that represent BDCs' specific strengths and weaknesses, including their business and risk position, capital and earnings, and funding and liquidity. Additionally, we factor in their broader affiliation with asset managers.

Chart 3

What are the differences among the three main BDC structures?

BDCs can be structured as public, private, or perpetual funds, each of which meets different liquidity needs. These structures aim to provide varying levels of access to public capital markets, gain tax efficiencies, reduce restrictive burdens on leverage and affiliated transactions, incentivize management fees, and enhance transparency and diversification.

Publicly traded BDCs 

Publicly traded BDCs are structured as closed-end funds that trade on stock exchanges and are typically listed on the NASDAQ or the New York Stock Exchange. They are formed as a blind-pool vehicle or through the acquisition of an existing portfolio and can issue equity when they trade above book value. Otherwise, board approval is necessary. An initial public offering (IPO) is typically conducted through a traditional firm commitment underwritten offering.

Among the three structures, publicly traded BDCs offer the most liquidity. Their share structure is similar to that of other listed companies and provides numerous offerings that enable them to diversify capital raising routes. These include common stock offerings, preferred stock offerings, rights issuances, and other securities, such as debt or convertible securities.

Publicly traded BDCs are the only type of BDCs that are accessible to both institutional and retail investors. Generally, they deliver higher returns that typically come from dividends. While publicly traded BDCs can experience price volatility and other risks, their exposure to the risk of forced redemptions is not as high as that of some other investment structures.

Private non-traded BDCs 

Unlike publicly traded structures, private non-traded BDCs do not trade on exchanges and do not offer multiple share classes.

Shares are typically offered via private placement and are only available to accredited investors, while shares are issued at or above the BDC's net asset value (NAV) per share. Private non-traded BDCs often resemble a capital call structure, where investors make a commitment and the investment is drawn down over time, similar to a private fund.

Generally, private non-traded BDCs' equity is sticky because their base of predominantly institutional investors--including pension and sovereign funds, alongside insurance companies--commit long-term capital to these assets.

These structures typically have a finite life of five to seven years. Thereafter, they must undertake a liquidity event in the form of an IPO, a merger with another BDC, or a complete wind-down of the vehicle. Generally, no other liquidity options are available prior to the IPO, although private non-traded BDCs offer some liquidity through share repurchases, usually on a quarterly basis.

Typically, this structure is exposed to redemption risk of about 2.5% of NAV on a quarterly basis.

Perpetual non-traded BDCs 

Perpetual non-traded BDCs are evergreen funds and offer a share structure with indefinite duration and periodic liquidity through quarterly share repurchases. They are only available to institutional investors and high-net-worth individuals, who meet certain suitability requirements.

Rather than issuing equity through the stock market, perpetual non-traded BDCs raise capital on a continuous basis through unregistered equity offerings that are sold through warehouses, private banks, and broker-dealers.

Shares may be sold through continuous offerings up to a pre-determined limit, while liquidity is offered through periodic repurchase offers. These BDCs are exposed to redemption risk capped at 5% of NAV on a quarterly basis.

Since 2021, perpetual non-traded BDCs have gained in popularity and growth due to changing investor appetite and preferences regarding timing and liquidity options in the private credit market.

Chart 4

What other structures exist?

Interest in interval funds has increased in recent years. Similar to private non-traded BDCs, interval funds are nontraded closed-end funds that offer to repurchase a set percentage of outstanding shares periodically. A considerable share of these funds' assets is allocated to private credit. For liquidity reasons, both interval funds and private non-traded BDCs hold a comparable share of BSLs that exceeds the typical share size of publicly traded BDCs.

Interval funds offer more liquidity, because they allow periodic redemptions. Yet these are capped as a percentage of the underlying assets. Since they are required to submit public filings of their asset holdings every six months, interval funds also increase transparency in private markets.

How are BDCs managed internally and externally?

Internally managed BDCs resemble typical operating companies and employ their own in-house investment professionals, sales teams, and risk personnel. In the case of internally managed BDCs, the interests of investors and investment professionals are typically aligned. However, management fees can be relatively high, especially if the fund has not achieved scale.

In comparison, externally managed BDCs are managed by a separate investment advisor, who must be approved by the BDC's board of shareholders. In contrast to their internally managed peers, externally managed BDCs offer access to a wider range of deals with a lower management fee, because the cost is spread across a wider asset base.

The fundamental difference lies in the decision-makers, who are in-house teams for internally managed BDCs and separate investment advisors for externally managed BDCs. Before 2003, the largest BDCs were primarily internally managed.

Across our BDC portfolio, we have observed a trend toward externally managed BDC funds functioning as a funding source for alternative asset managers' broader private credit platforms. Following a steady stream of IPOs and a shift in focus to the externally managed model in 2004, nearly all newly filed BDCs are now structured to be externally managed. Currently, about 9% of all BDCs are externally managed.

What are the underlying assets that BDCs invest in and how do they feed into their valuations?

BDCs invest most of their capital in non-public companies. Loans account for over 70%, most of which are private credit loans.

In addition to private credit loans, BDCs' loans include BSLs. As of third-quarter 2024, private credit loans accounted for 58% of BDCs' $450 billion in assets and interval funds, while BSLs contributed 26%. Overall, roughly 85% of BDCs' assets consist of either private credit loans or BSLs, with the remaining 15% comprised of bonds and equity.

By law, all BDC assets must be valued on a quarterly basis. For assets where market quotations and pricing are readily available, the mark-to-market value is used as the key measure.

Assets for which price discovery does not exist are valued based on prevailing fair value practices. These require the assessment of specific facts and circumstances for each portfolio investment, as well as a consistently applied valuation process. Each debt and equity security are valued individually. Since a single standard for determining fair value in good faith does not exist, valuations can vary significantly and have been a frequent source of contention in the industry.

Some publicly traded BDCs have recently been trading at a discount, as their equity prices have fallen amid broader market volatility. Because BDCs are mandated to invest in SMEs, they are not impervious to the effect of economic deterioration and rising recession risk. These investment vehicles often have idiosyncratic, bilaterally negotiated exposures that are illiquid. When markets experience disruptions or the credit cycle turns, their valuations may change.

How do you assess BDCs' external valuations within your framework?

Since private credit loans, which account for most BDC assets, are not traded regularly on a secondary market, market pricing and valuations are largely not available.

This highlights the importance of BDCs' valuation policies, which must comply with generally accepted accounting principles and the Financial Accounting Standards Board's valuation rules with their three-tier fair value hierarchy.

• Level 1 valuations are based on quoted prices derived from active markets for identical assets.
• Level 2 markers are based on quote prices in the market that are not active or for which significant inputs are observable.
• Level 3 valuations are based on inputs that are not observable and are commonly referred to as a marked-to-model approach.

Given the nature of BDCs, most assets fall into the level 3 category, under which they rely on significant assumptions within a modelled approach. Typically, BDCs use external third-party valuation firms to evaluate each portfolio investment at least annually. Nonetheless, valuation firms often provide a range of values, meaning the onus is on the BDC and its valuation team to determine the final value.

Valuation practices and outputs are important factors in our analysis. We can track how the prices received and exit prices compare with recent marks. Occasionally, we compare these marks with relevant BDCs with the same exposure to syndicated deals. Valuation differences can reflect control premiums or other distinctions, while indicating risk appetite and risk controls.

What are the potential risks and opportunities associated with BDCs' various funding sources?

BDCs continually need to source credit at different stages of their lifecycle to maintain sufficient liquidity to:

• Respond to investors' redemption requests;
• Fund new investment opportunities;
• Align with tax requirements;
• Meet ongoing operational expenses; and
• Navigate unforeseen market conditions.

Generally, all BDCs aim for a diversified funding mix to maintain access to different markets in the event of dislocation of certain funding types.

Newer BDCs will typically rely on subscription facilities, different forms of revolving credit facilities, and private placements to fund growth. Unlike the traditional pathway of raising only unsecured debt in bond markets, BDCs can also raise secured funding through a collateralized loan obligation (CLO) instrument and borrow from financial institutions through secured facilities via a special purpose vehicle (SPV).

Typically, BDCs with SPV financing have enhanced flexibility to drop down on these facilities as they make the investment. BDCs fund their growth by drawing down on these facilities and using funds issued through other debt markets to pay down debt. Thus, while a CLO provides a cheaper form of financing, the BDC must scale up the investment that it intends to pledge.

Publicly traded BDCs can also access equity markets and do not have to rely solely on debt financing. However, if the shares of publicly traded BDCs are trading at a discount to NAV per share, the BDC is more limited in its ability to raise equity. This would likely lead to stress for the BDC. If trading at a discount, the BDC can issue equity or conduct a rights offering, contingent upon securing shareholder approval.

How do BDCs differ from private credit vehicles, such as CLOs and other direct lending funds?

BDCs' specific mandate to support small businesses remained unchanged. Due to regulations, BDCs have leverage constraints that enable their treatment as more tax-efficient investments for investors if they distribute at least 90% of their annual profits as dividends.

Given that BDCs can invest in both debt and equity, BDCs may serve as warehouses, where investments are collected before being refinanced. BDCs may also be used to finance the equity portion of structured financings or other funds. These are asset risks typically not seen in CLOs or private credit funds.

Other investment vehicles, such as close-end private credit funds, may invest in similar assets but would not face the same constraints regarding asset construction and distribution. Similar to alternative investment funds but unlike CLOs, BDCs may also be publicly traded. Direct lending funds are likely less levered than BDCs and can therefore carry more risk. However, the trade-off consists of fewer liquidity options. These funds lack the favored tax treatment that BDCs receive.

CLOs are among the funding sources for BDCs, with many managers that set up BDCs also commonly issuing CLOs to fund their BDCs. BDCs are less structured and more flexible than CLOs, but their portfolio mix and leverage is constrained. While the different vehicle types may invest in similar assets, BDCs can take on significantly higher asset risk than CLOs. Additionally, they typically do not have to adhere to asset-liability management guidelines on whether investments that mature before liability payments must be paid.

Chart 5

How does BDCs' use of PIK toggles affect their performance in a potentially prolonged period of increased volatility?

The prevalence of PIK options can indicate stress for borrowers that could lead to losses. However, it is important to distinguish between:

• Transactions that were executed with the option to convert portions of their applicable margins to PIK loans from day one; and
• Deals where an amendment is executed post-transaction to convert the cash-paying instrument to a PIK loan due to liquidity or operating concerns.

The growth in PIK instruments in recent years mainly resulted from loans originated with a PIK option. More than two-thirds of these PIK loans are set to mature in 2028 or thereafter. This suggests that most of these loans are of more recent vintages and, as such, do not appear to pose any notable near-term refinancing risk.

On the credit front, BDCs' portfolios are experiencing increasing, but manageable, stress. We know this because BDCs publicly disclose their investments at fair value on a quarterly basis. Investments marked at 80% of cost or below typically indicate stressed investments or non-accruals.

Under the current market conditions, we expect PIK income will rise over the next few quarters. This is because BDCs that typically focus on lending to leveraged companies face an expected economic slowdown, sustained inflationary pressures, the effect of trade conflicts, and potentially rising interest rates and funding costs. We expect non-accrual ratios will rise.

Publicly rated BDCs' non-accrual ratios have already increased to an average of approximately 2.6% as of December 2024. This remains below the long-term average of 2.0% that has prevailed since 2008 and the peak of 6.0% during the COVID-19 pandemic.

From a balance-sheet perspective, PIK income is typically accounted as interest income and BDCs must pay 90% of their taxable income, including PIK. Not all loans that have a PIK feature are bucketed as non-accruals.

An increasing number of BDCs are making underwriting investments, with a PIK optionality for the first two years. A cash-paying or PIK loan that is placed on non-accruals will typically have fair value markdowns on a quarterly basis. BDCs account for this through unrealized loss, which should be reflected in retained earnings and NAV for that quarter. When a BDC resolves its non-accruals and amended PIK loans through sale or restructuring, the unrealized loss moves to realized losses without affecting the NAV if the fair value marks have not deteriorated.

Related Research

• PIK-Paying Loans Decline As A Share Of BDC Assets, April 8, 2025
• BDC Assets Show The Prevalence Of Payments-In-Kind Within Private Credit, Dec. 12, 2024
• Credit FAQ: How We Rate Common Private Credit Investment Vehicles, Sept. 4, 2024
• Financial Institutions Rating Methodology, Dec. 9, 2021

Primary Contacts:	Ramki Muthukrishnan, New York 1-212-438-1384; ramki.muthukrishnan@spglobal.com
	Matthew B Albrecht, CFA, Englewood 1-303-721-4670; matthew.albrecht@spglobal.com
	Gaurav A Parikh, CFA, New York 1-212-438-1131; gaurav.parikh@spglobal.com
	Evan M Gunter, Montgomery 1-212-438-6412; evan.gunter@spglobal.com
Secondary Contacts:	Michelle Ho, London 65322515; michelle.ho@spglobal.com
	Ruth Yang, New York 1-212-438-2722; ruth.yang2@spglobal.com