BDCs: An Alternative Way to Access the Benefits of Private Credit

Demand for private credit is surging. The market size has nearly doubled since 2020, reaching an estimated $1.4 trillion in early 2023.¹ This growth is expected to continue, with projections suggesting it could hit $2.3 trillion by 2027.²

For investors, private credit offers the potential for higher yields and diversification. Meanwhile, corporate borrowers value the flexibility and speed offered by private lenders compared to traditional banks, many of which have pulled back lending in this space.

Private Credit Becomes More Entrenched as Banks Retreat from Middle Market Lending

The 2023 regional banking crisis accelerated the pre-existing trend of banks retreating from lending to private companies that tend to be below investment grade or not rated. This void is being filled by private credit. Unlike banks, which are subject to stricter regulations and capital requirements, private lenders offer more flexibility and can tailor loan structures to meet the specific needs of borrowers. This flexibility, coupled with their increasing pool of capital positions private credit as a crucial source of financing, particularly for businesses that may not meet the stricter criteria of traditional banks.

There’s Just One Problem: Traditional Private Credit is Illiquid

Traditional private credit investments, while offering the potential for attractive returns and yield, come with a drawback: illiquidity. Unlike publicly traded stocks or bonds, these investments often involve long lock-up periods, typically several years. This means your money is tied up for the duration, inaccessible for immediate needs or strategic portfolio adjustments. This inflexibility can be a major hurdle for investors who require more dynamic access to their capital, especially in a market rife with uncertainties. In an environment where liquidity is highly prized, Business Development Companies (BDCs) present a compelling, liquid alternative to traditional private credit strategies.

BDCs: A Liquid Alternative in Private Credit

BDCs bridge the gap between traditional private credit and publicly traded securities. BDCs offer the same benefits as traditional private credit strategies – the potential for higher yields and diversification away from traditional stocks and bonds – but in a much more liquid form.

BDCs Offer Attractive Relative Yield

Source: Factset. Past performance is no guarantee of future results. BDCs represented by MVIS US Business Development Companies Index; U.S. HY Bonds represented by ICE BofA US High Yield Index; REITs represented by FTSE NAREIT Equity REITs Index; Utilities represented by Standard & Poor’s 500 Utilities Index; U.S. Stocks represented by Standard & Poor’s 500 Index; U.S. IG Bonds represented by Bloomberg Barclays US Aggregate Bond Index; U.S. 10 Yr Treasury represented by ICE BofA Current 10-Year US Treasury Index.

Since BDCs are publicly traded on exchanges, investors can buy and sell shares daily, providing the flexibility to adjust their holdings as needed. This makes BDCs a compelling option for investors seeking exposure to the private credit market without sacrificing the ability to access their capital when necessary. It is important to note though, that because of their daily liquidity, publicly traded BDCs can exhibit greater short-term volatility relative to traditional private credit funds which tend to have lower liquidity and lack price discovery.