Rising Rates Become a Headwind: U.S. BDC Private Credit Shrinks for Two Consecutive Quarters
nashnova research
US business development companies saw portfolios shrink for a second straight quarter — down ~4% in Q3 — as rising rates squeezed, rather than boosted, the private-credit sector.
Rates went up — why did private credit shrink?
BDC (business development company — a listed fund that lends to mid-market firms) portfolios fell ~1% in Q2, then ~4% in Q3, marking two consecutive quarters of decline.
Ares Capital, Blackstone Secured Lending Fund, and two Blue Owl Capital listed funds all reported sharply lower loan originations this year; some saw repayments exceed new deployments.
This means → BDCs are not choosing to shrink. They cannot deploy capital fast enough — old loans mature and pay back, but new deals are not there to replace them.
Can't lend — and banks are stealing deals?
Wall Street banks undercut BDCs on pricing and captured a record ~$12 billion in deals, directly eating into BDC deal flow.
BDC shares now trade at roughly 84% of net asset value (NAV). In plain terms = the market says these funds' assets are worth only 84 cents on the dollar, making new equity issuance uneconomical — it would dilute existing shareholders at a steep discount.
Citi high-yield strategist Steph Choe summed it up: "Capital is being returned to investors rather than finding new deployment opportunities — the BDC asset class is shrinking."
Where are the bad loans piling up?
Non-accrual loans — where borrowers have stopped paying interest — rose from 1.2% of portfolios a year ago to 1.9% in Q3, nearly doubling.
Defaulting borrowers span multiple sectors: lab-equipment supplier Flinn Scientific, restaurant-software platform HungerRush, and ed-tech firm Discovery Education.
Loans priced below 80 cents on the dollar now make up 5% of BDC portfolios, up from 3% at end-2025; loans priced at 97 cents or above fell from 88% to 80%.
This reflects a system-wide deterioration in loan quality, not isolated blow-ups.
Why are software loans the worst hit?
SLR Investment CEO Michael Gross pointed to loans underwritten during the 2020–2021 zero-rate era, particularly in software.
In plain terms = these companies borrowed when rates were near zero. Now rates sit at 4% — interest costs have multiplied, but earnings never kept pace. They simply cannot service the debt.
Gross added that BDCs depend heavily on private-equity sponsors to generate new deals or refinancings, and both channels are currently sluggish, further blocking capital deployment.
Some managers see opportunity here?
Blue Owl co-CEO Marc Lipschultz called repayments a positive: "Borrowers are repaying at 100 cents, which lets us redeploy into new loans at wider spreads."
Ares Capital CEO Kort Schnabel disclosed $1.1 billion in new Q4 commitments and a $2.5 billion pipeline of reserves awaiting deployment.
But Axonic Capital's Peter Cecchini was blunt: "When you're taking markdowns, your ability to deploy capital naturally declines."
What to watch next?
Morgan Stanley Direct Lending CEO Michael Occi sees "a clear disconnect between direct-lending fundamentals and investor sentiment."
This means → the market may be more pessimistic about BDCs than the actual fundamentals warrant — but only if credit losses stop climbing.
Whether BDCs can hold portfolio size steady before private-equity deal flow recovers will be the key test of whether this asset class can exit its contraction cycle.
市场有风险，内容仅供研究参考，不构成投资建议。