Navigating Private Credit Markets with Business Development Companies

Private credit has been making headlines, and for good reason. Bolstered by a pullback in bank lending, the asset class has expanded rapidly, with private credit AUM surpassing $1.7 trillion in 2023¹ . Many estimate it will continue to grow, and could reach $2.8 trillion by 2028² .
Investors are attracted to private credit for several reasons: stable, attractive yields; downside protection; inflation protection; and diversification benefits. Historically, the asset class has provided low volatility and strong relative returns through market cycles. This has led institutions from family offices to global insurers to increase their exposure through private funds³⁴.

Direct lending, a type of financing that is directly negotiated between a lender and a corporate borrower, is the largest category within private credit, and has grown nearly six-fold in the last 8 years, now making up 44% of private credit AUM⁵ . This strategy can be especially appealing due to its steady current income and relatively low risk, as direct lenders tend to have a senior position in the company’s capital structure.

But you don’t have to be an institution or high-net-worth investor to access private credit. There’s already a way for advisors to provide their clients access: publicly traded Business Development Companies (BDCs).

BDCs have grown in popularity alongside private credit, largely due to their relatively low loss rates and high dividend yields. According to LSEG LPC, BDC AUM reached a new high of $315 billion, growing by 15% in 2023. Raymond James research indicates the weighted average forward dividend yield for publicly traded BDCs is currently 10.7%, appealing to income-oriented investors.

The BDC structure itself offers several advantages. BDCs are listed on major stock exchanges and can be traded daily with complete liquidity, contrasting with traditional private credit funds that often have multi-year lockup periods and limited liquidity windows. BDCs are tax-efficient, structured as regulated investment companies (RICs) to avoid double taxation by passing through income to investors as dividends. They offer transparency through SEC reporting requirements, diversification across industries, and the ability to use leverage to potentially enhance returns.

Just like there are many flavors of private credit investments for institutional investors, there are distinct structures and strategies for publicly traded BDCs. Internally managed BDCs tend to be more aligned with their investors, as management incentives prioritize long-term sustainable shareholder value. An internally managed BDC includes the operating business, not just a pool of assets. Historically, this means that internally managed BDC’s focus both on returning steady dividends to investors and growing those dividends. For investors seeking exposure to private credit without public market volatility, many BDCs also manage private funds. BDC strategies can include both equity and debt, ranging from common stock to specialty credit.

While private credit is not new, the current market environment has led to a renaissance. Publicly traded BDCs offer a tried and true way to access private credit, providing a unique opportunity for advisors and their clients to participate in this growing and attractive asset class.