Noise or warning bells? Recent price volatility in Business Development Companies (BDCs) has reignited concerns of deeper fragility within private credit. A sequence of high-profile events such as the First Brands default in late 2025, the 19% net asset value (NAV) reduction in BlackRock TCP Capital in January, and February’s sharp sell-off across BDCs coinciding with a broader rout in publicly listed software equities, reinforced that perception. Viewed superficially, these developments appear to resemble signs of early stress. However, the assumption that BDC share price weakness reflects systemic credit impairment warrants closer examination. Performance dispersion across BDCs during these episodes suggests that recent volatility may be driven less by deterioration in private credit fundamentals and more by portfolio composition and structural characteristics of the BDC vehicle itself.

Structure creates sensitivity. BDCs were established under the Small Business Investment Incentive Act of 1980 to channel capital toward middle-market companies underserved by traditional banks. By regulation, at least 70% of a BDC’s assets must be invested in qualifying private debt or private equity of domestic companies, or public companies with market capitalisations below USD250mn. The remaining 30% may be allocated to non-qualifying assets, including foreign companies, private funds, or larger public companies. In addition to asset composition requirements, BDCs must distribute at least 90% of taxable income to shareholders. This distribution mandate materially limits the use of earnings for reinvestment and makes extrinsic fundraising via IPOs or follow-on share issuances essential for portfolio expansion. Importantly, new capital reaches underlying borrowers only when a BDC issues new shares in the primary market. By contrast, most day-to-day trading takes place in the secondary market, where investors merely exchange shares without impacting the underlying loan portfolio. This structural feature creates a separation between public market price movements and the direct capitalisation of portfolio companies, and is fundamental to the elucidation of BDC volatility drivers.

Volatility driver 1 – Market sentiment. In the secondary market, BDCs trade on risk appetite, macro expectations, liquidity conditions, and sector rotations. These forces can reprice the public equity wrapper much faster than portfolio NAV, which typically adjusts more gradually as portfolio performance and borrower fundamentals filter through. Accordingly, discounts and premiums can swing on sentiment even before improving credit conditions, earnings power, or valuation gains can be reflected in NAV. This dynamic has secondary implications. Because BDCs generally cannot issue equity below NAV, sustained discounts can constrain primary market issuances precisely when capital is required for portfolio growth. To maintain or expand assets, a discounted BDC may end up leaning more into debt, increasing leverage even if underlying portfolio performance remains broadly in line with expectations. As a result, volatility in the public equity wrapper can exert destabilising influence over capital allocation and financing decisions, independent of the health of the underlying credit portfolio.

Volatility driver 2 – Flexibility basket. The second source of volatility lies within the 30% flexibility basket. While at least 70% of assets must be qualifying investments, up to 30% can be deployed into non-qualifying assets, such as large-cap public equity, preferred equity, warrants, and structured credit (i.e. collateralized loan obligations, mortgage-backed securities, and credit-linked notes). Moreover, even within the 70% qualifying bucket, allocations can include equity of exchange-traded small-cap companies. This means BDCs are not to be viewed simply as windows to private credit, and their volatility can reflect meaningful equity and structured finance exposures. These exposures behave differently from first-lien private credit, particularly in risk-off environments, and can materially influence return profiles and volatility characteristics. The February software sell-off made this clear. BDCs with higher allocations to software-related equity positions experienced larger unrealised losses and sharper share price volatility. This observation can be extrapolated beyond software to BDC portfolios in general where higher equity-to-senior debt ratios exhibited more pronounced volatility. Invariably, BDCs with portfolios composed of c.95% senior secured loans demonstrated comparatively resilient performance.

Where narrative outruns nuance. Revisiting recent headlines via these lens shifts the prevailing narrative around BDCs and private credit meaningfully, and reveals that much of the criticism could be a mischaracterisation of where risk truly resides. A June 2025 study by Moody’s Analytics concluded the need to adopt a more cautious stance toward private credit by using BDC market prices as a proxy for underlying risk. However, relying on publicly traded share prices implicitly blends sentiment-driven volatility with asset-level credit performance, while giving less weight to the role of equity and structured exposures that can materially influence BDC valuations. The widely publicised defaults of Tricolor and First Brands were also portrayed as an undesirable outcome of opacity in private credit. Expert analyses, however, suggest more idiosyncratic drivers. Tricolor’s challenges stemmed from subprime auto lending to low-income and undocumented borrowers, characterised by weaker underwriting standards and documentation practices more typical of junior syndicated exposures than senior secured direct lending. Both Fitch and Morningstar were also quick to attribute First Brands’ challenges to off-balance-sheet financing within the broadly syndicated loan market, contrasting it with the “better aligned capital structures” common in middle-market direct lending. More recently, BlackRock TCP Capital’s NAV markdown was attributed to underperforming equity investments, including Renovo and Hylan. Exposures to credit-stressed e-commerce aggregators such as InMobi, Razor, and SellerX also contained significant equity components which amplified downside relative to senior debt positions. In each of these cases, equity or subordinated exposures materially influenced outcomes.

Stability sits higher in the stack. Are there underlying credit stress in BDCs? Our study reveals that non-accruals have, in fact, risen. However, the implied recovery rates on such loans have also improved, suggesting any losses are expected to be contained rather than severe. In other words, while credit stress exists, it does not appear to be impairing capital in a way consistent with a systemic breakdown. Additionally, we noticed that BDCs concentrated in senior secured first-lien loans exhibited lower payment-in-kind (PIK) exposure and have experienced comparatively lower share price volatility. This observation can also be extrapolated to other private credit vehicles with purer senior secured first-lien loans, such as primary direct lending funds, which have generally delivered superior performance and stability relative to publicly traded BDCs.

Liquidity and its price tag. Ultimately, the debate returns to liquidity. BDCs offer daily tradability, an attribute that is understandably attractive. Yet liquidity comes with a heavy price tag. Not only does liquidity encourage poor market timing, public wrappers such as BDCs introduce sentiment-driven volatility, alongside equity and structured finance risk exposures, which may not reflect fundamentals of underlying private credit. For private credit investors, the more durable answer is to choose private credit vehicles that are anchored in high-quality senior secured loans, as position in the capital structure matters most when conditions deteriorate. In this respect, primary private credit funds, which consist purely high-conviction quality senior secured loans with strong covenant controls, provide the most structurally insulated model for stable long-term compounding. For investors with liquidity constraints, however, private credit evergreen vehicles might offer a compelling middle ground, providing periodic access to capital while preserving seniority and structural protections. Prioritise quality and resilience first, and let liquidity play a supporting role, not the lead.

Figure 1: Not all BDCs were hit during the software rout