BDCs: The Liquid Alternative to Private Credit

In the ever-evolving financial landscape, investors are constantly seeking innovative ways to diversify their portfolios and achieve optimal returns. Over the last decade, private equity and credit strategies have surged in popularity due to their unique return and yield potential. However, these typically come with the trade-off of reduced liquidity due to lockup periods. Recently, though, capital fundraising for these private strategies has witnessed a decline. The importance of liquidity, especially in a market rife with uncertainties, is becoming more pronounced. In today’s market where liquidity is highly prized, Business Development Companies (BDCs) present a compelling, liquid alternative to traditional private credit strategies.

Lack of Liquidity Impedes Private Capital Fundraising

Private credit and equity strategies have soared in popularity, offering attractive return and diversification opportunities. They have granted investors access to niche markets, which leads to distinct return profiles. Yet, recent data from PitchBook indicates a roughly 31% year-on-year decline in capital commitments to private strategies as of the end of June. One reason why investor appetite has waned for these strategies is their general lack of liquidity.

As geopolitical tensions, economic fluctuations and other macro factors introduce volatility and unpredictability into the financial landscape, the value of liquidity has skyrocketed. Investors, now more than ever, are prioritizing the ability to access and redeploy capital swiftly. This heightened emphasis on liquidity is leading many to reconsider the long lockup periods associated with private market strategies, resulting in a pivot towards more liquid investment vehicles, like BDCs, that can offer a similar exposure without liquidity constraints.

Source: PitchBook Data, Inc.; Q2 2023 Global Private Market Fundraising Report.

BDCs: The Liquid Alternative to Private Credit

Business Development Companies are publicly traded entities focused on lending to and investing in private businesses. Established to promote investment in small and mid-sized firms, BDCs open doors to private credit markets. A standout advantage of BDCs is their inherent liquidity. Unlike traditional private credit funds, which often have multi-year lockup periods, BDCs are listed on major stock exchanges and can be traded daily. This grants investors the ability to modify their positions in response to market changes, personal financial needs or altered investment tactics.

In unstable market scenarios, the capacity for a swift exit or position reduction is invaluable. Private credit fund lockup periods can be both an asset and a liability. While they can insulate investors from short-term market fluctuations, they can also hinder capital access during extended downturns or unexpected liquidity requirements. Thus, an increasing number of investors are opting for BDCs as a more liquid alternative.

The Merits of a Diverse BDC Investment Strategy

There are many publicly traded BDCs available in the market today, each with distinct risk profiles based on their asset structures, sector and credit exposures, financing terms and management quality. Investing in individual BDCs demands rigorous research to fully understand each entity. A holistic market approach to BDC investment can offer industry-wide diversification, negating the need for granular BDC assessments.

The VanEck BDC Income ETF (BIZD) offers broad market exposure to publicly traded U.S. business development companies and may be appealing for those looking for a liquid alternative to private credit funds. BIZD seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS^® US Business Development Companies Index, which tracks the overall performance of publicly traded business development companies.

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