Private Credit’s Popular BDCs Are Facing A New Due Diligence Test
Business development companies became one of the wealth channel’s favorite private credit products because they offered something investors wanted badly: income.
For advisors, the pitch was easy to understand. Public bonds had been volatile. Bank deposits were not always enough. Traditional income portfolios were under pressure. Nontraded BDCs offered access to private loans, often with attractive distribution rates and the promise of lending to companies outside public markets.
That story helped drive billions of dollars into the category.
Now the same growth is creating harder questions. Some funds have become large enough that they may be competing for the same upper-market loans. Falling rates can pressure floating-rate income. Credit problems at companies such as First Brands and Tricolor have reminded investors that private loans can still go bad. Publicly traded BDCs have also faced stock pressure, while nontraded BDCs have drawn more attention around liquidity and redemption limits.
None of this means BDCs are automatically bad products. It means advisors can no longer treat the category as a simple yield solution.
The better question is not, “Do BDCs pay attractive income?” The better question is, “Which BDC, with what loan exposure, what liquidity terms, what credit quality and what role inside the client’s portfolio?”
TL;DR
Nontraded BDC sales surged: InvestmentNews reported that nontraded BDC sales reached $26.7 billion through July 2025, compared with $35.4 billion for all of 2024.
Growth has created concentration concerns: A veteran industry executive told InvestmentNews that some large private credit funds may be investing in similar upper-market deals.
Credit stress is now more visible: First Brands and Tricolor raised fresh questions about private loan exposure, borrower quality and how losses may move through BDC portfolios.
Rate cuts can change the income story: Many BDC loans are floating rate, which can help when rates rise but reduce portfolio income when rates fall.
Liquidity remains a key issue: Nontraded BDCs may offer limited repurchase programs, but they are not daily-liquid funds.
Advisor due diligence has to go deeper: Advisors should look at portfolio overlap, non-accruals, PIK income, leverage, redemption pressure, distribution coverage and client suitability.
The BDC Boom Was Built On A Simple Promise
InvestmentNews reported that the private credit market was raising questions for popular BDCs, especially as sales of nontraded business development companies continued to boom.
The basic appeal is easy to understand. BDCs lend money to private companies, often small and midsized businesses that may not rely on traditional bank lending. In return, investors seek income from the interest paid on those loans.
For retail investors and advisors, that structure can sound attractive. The product offers private credit exposure without requiring a client to invest directly in private loans. It can also provide income that may look compelling compared with traditional bonds.
But simplicity at the sales level can hide complexity at the portfolio level.
A BDC is not just “private credit.” It is a specific vehicle with specific loans, leverage, valuation practices, distribution policies, liquidity limits and manager decisions. Two BDCs can both invest in private credit and still have very different risk profiles.
That distinction matters more now because the category is no longer small.
Growth Has Become Part Of The Risk Conversation
Robert A. Stanger & Co. reported that alternative investment fundraising reached approximately $102.3 billion through July 2025, led by nontraded BDCs at an estimated $26.7 billion. Stanger also said public nontraded BDC fundraising was up 27.7% compared with the same period a year earlier.
Those numbers show demand. They also explain the concern.
When private credit products raise huge amounts of money, managers have to put that money to work. That can be difficult if the fund is trying to stay selective. A smaller fund may have more room to focus on specific middle-market opportunities. A much larger fund may need bigger deals, broader deployment and more repeat exposure to loans that many other large managers are also reviewing.
That is why the InvestmentNews article’s most important concern was not simply that BDCs were popular. It was that popularity may be changing where some funds invest.
If several large funds crowd into similar upper-market loans, portfolio diversification may not be as strong as investors assume. A client may own different funds with different brand names but still have exposure to the same types of borrowers, sponsors or sectors.
That is a due diligence problem, not just a market problem.
The Real Question Is Portfolio Overlap
Private credit is often sold as diversification. But diversification has to be examined, not assumed.
A client may own a traditional bond fund, a private credit fund and a nontraded BDC and believe the portfolio is diversified across income sources. That may be true. But if the private credit portion is concentrated in similar senior loans to private equity-backed companies, the diversification may be narrower than the client realizes.
Portfolio overlap can show up in several ways.
Some funds may lend to the same borrower. Others may lend to companies owned by similar private equity sponsors. Some may concentrate in software, health care, business services or consumer-related borrowers. Others may hold loans with similar floating-rate structures and similar sensitivity to borrower cash flow.
The issue is not that overlap automatically creates danger. The issue is that advisors need to know when it exists.
What Advisors Should Compare Across BDCs
Borrower mix: Advisors should review whether the fund is lending to lower middle-market, core middle-market or upper-market companies.
Sector exposure: Advisors should check whether the portfolio is concentrated in software, health care, consumer finance, industrials or other areas.
Sponsor exposure: Advisors should understand whether loans are tied heavily to private equity-backed borrowers.
Loan seniority: Advisors should separate first-lien loans from second-lien, unsecured, mezzanine or preferred positions.
Manager overlap: Advisors should watch whether different products use similar origination channels or co-invest in the same deals.
Credit watchlist trends: Advisors should review non-accruals, markdowns and troubled borrower exposure over time.
This is where BDC analysis becomes more specific than reading a distribution rate.
First Brands And Tricolor Changed The Mood
Credit cycles often change slowly, then suddenly. A few borrower problems can shift investor attention from yield to risk.
InvestmentNews noted that bankruptcies involving First Brands and Tricolor helped trigger recent concern around nontraded and illiquid BDCs. The issue was not that every BDC was deeply exposed to those companies. The issue was that the failures reminded investors how difficult private credit exposure can be to see clearly from the outside.
When a borrower hits trouble, advisors need to know whether a fund has exposure, how large that exposure is, where the loan sits in the capital structure and whether the fund has already marked the position down.
Private loans are not priced on a public exchange every second. Their valuations can depend on manager marks, third-party valuation work, borrower performance and market assumptions. That does not make the marks wrong, but it does make transparency more important.
A public bond sell-off is visible quickly. A private loan problem may take longer for clients to understand.
That gap can create trust issues if advisors cannot explain what is happening.
Falling Rates Can Make The Income Story Harder
The rate environment is another reason BDC conversations have become more complicated.
Many private credit loans are floating rate. When interest rates rose, that helped many private credit funds generate higher income. Investors could see strong distributions and advisors could explain the appeal easily.
But the same mechanism can work in reverse. If rates decline, floating-rate loan income can fall. That can put pressure on distributions unless the manager offsets it through spreads, leverage, portfolio rotation or other sources.
This is one reason private credit cannot be explained as if its yield is fixed.
A client who bought a BDC for monthly income needs to know whether that income can change. They also need to know whether the distribution is supported by net investment income, whether return of capital is involved, whether payment-in-kind income is rising and whether the payout policy is sustainable under lower-rate conditions.
NJ Financial News recently covered a related issue inBlackstone BCRED’s payout cuts and private credit flow pressure, where the main lesson was that private credit income must be explained as variable, not guaranteed.
That lesson applies beyond one fund.
Liquidity Is Not A Side Note
Nontraded BDCs are often designed for investors who can accept limited liquidity. That structure can make sense because the underlying assets are private loans, not publicly traded securities that can always be sold easily.
But clients must understand that before they invest.
A nontraded BDC may offer periodic repurchases, often subject to caps. That is very different from owning a daily-traded mutual fund or ETF. If many investors seek liquidity at once, the fund may limit redemptions.
Reuters reported in July 2026 that Blue Owl maintained a 5% quarterly withdrawal limit for two private credit funds after investors sought to withdraw $4.7 billion from those funds in the second quarter. Reuters also noted that nontraded BDCs typically offer liquidity through quarterly tender offers of up to 5% of shares.
That kind of redemption structure is not necessarily a flaw. It can protect remaining investors by reducing the need for forced asset sales. But it is a major suitability issue.
If a client may need cash quickly, a nontraded BDC may not be the right vehicle for that portion of the portfolio. If the client understands the liquidity trade-off and has sufficient cash elsewhere, the structure may be more reasonable.
The product is not the only question. The client’s need for liquidity is the question.
Public BDC Weakness Adds Another Layer
Publicly traded BDCs and nontraded BDCs are not the same product, but public-market weakness can still affect the conversation.
Reuters reported that a review of 53 publicly traded BDCs found 28 were loss-making in the first quarter of 2026, based on S&P Global Market Intelligence data. The report said the pressure reflected falling asset values, higher debt costs and more complicated borrowing arrangements.
That public BDC data does not automatically prove that nontraded BDC portfolios face the same level of stress. But it does show why investors are asking more questions about credit quality, leverage, valuations and loan performance.
Public markets can be noisy, but they can also serve as a warning system. If traded BDCs are under pressure, advisors should not ignore the signal just because a nontraded product reports NAV differently.
The right response is not panic. It is more careful review.
The Private Credit Story Is Not One-Sided
A balanced view matters here.
Private credit is not collapsing simply because BDCs are facing more scrutiny. BDCs still provide capital to companies that need financing. Many managers have produced attractive income. Many funds focus on senior secured lending, underwriting discipline and portfolio monitoring. Some redemption pressure may reflect investor liquidity needs rather than portfolio failure.
That nuance is important because fear can be as misleading as hype.
The problem is not private credit itself. The problem is shallow private credit analysis.
Advisors should avoid two extremes. One extreme treats BDCs as easy income products with little need for explanation. The other treats every headline about redemptions, bankruptcies or markdowns as proof that the category should be avoided entirely.
Neither approach is useful.
A better approach asks whether the specific BDC fits the specific client. That includes risk tolerance, income needs, liquidity needs, time horizon, portfolio size, tax situation and understanding of alternative investments.
What Stronger Due Diligence Should Look Like
A BDC review should go beyond brand name, distribution rate and recent performance.
The advisor should know what the fund owns, how it values those assets, how much leverage it uses and how the manager handles problem loans. The advisor should also compare the fund’s sales story with its actual portfolio behavior.
A Practical Advisor Review Framework
Income quality: Is the distribution covered by net investment income, or does the fund rely on less durable sources?
Credit deterioration: Are non-accruals, watchlist loans or markdowns increasing?
PIK exposure: Is payment-in-kind income rising, and does it suggest borrowers are paying with more debt rather than cash?
Leverage discipline: How much borrowing does the fund use, and are off-balance-sheet structures easy to understand?
Liquidity pressure: Are redemption requests rising, and has the fund hit repurchase limits?
Manager behavior: Has the manager reduced distributions, waived fees, changed strategy or altered portfolio positioning?
Client role: Is the BDC being used for income, diversification, total return or yield replacement?
The last question may be the most important. A product can be reasonable for one purpose and inappropriate for another.
Why Broker-Dealers Need To Tighten Product Supervision
Broker-dealers and RIAs also have responsibility here.
BDCs are often sold through advisor platforms, and those platforms must make sure advisors understand the products. That includes training on liquidity, fees, valuation, distribution coverage, leverage and suitability.
When a category becomes popular, sales momentum can create supervision risk. Advisors may begin to see the product as a standard income allocation rather than a complex alternative investment. Clients may focus on distribution rates and overlook liquidity limits. Marketing language may become too simple for the risks involved.
That is where firms need guardrails.
A strong product platform should require clear documentation of why the allocation fits the client. It should monitor concentration across alternative products. It should refresh advisor education when market conditions change. It should also make sure clients are not treating nontraded BDCs like cash substitutes or ordinary bond funds.
The more popular the product becomes, the more disciplined supervision needs to be.
The Client Conversation Should Be More Direct
Clients do not need a technical lecture on every loan in a BDC portfolio. But they do need plain-language explanations.
They should understand that a BDC lends to private companies. They should understand that private loans can default. They should understand that distributions can change. They should understand that the investment may not be easy to exit quickly. They should understand that higher income usually comes with trade-offs.
A good advisor can explain those points without scaring the client away unnecessarily.
The conversation should sound something like this: this may provide income and private credit exposure, but it is not a guaranteed-yield product, it is not fully liquid and it should occupy only a suitable portion of your portfolio.
That kind of honesty can protect the relationship if the market gets rough.
The Bigger Lesson From The BDC Boom
The BDC market’s success is not only a fundraising story anymore. It is becoming a quality-control story.
The products attracted billions because investors wanted income. Now advisors have to show that the income was not sold without enough explanation. They have to prove that clients understand the liquidity structure. They have to check whether different BDCs are truly different. They have to watch whether credit stress is isolated or spreading.
This is the natural next phase for a fast-growing alternative investment category.
Early growth brings excitement. Maturity brings scrutiny.
The firms, advisors and managers that handle the next phase well will be the ones that explain risk clearly, keep portfolio discipline and avoid pretending that private credit is simpler than it is.
Frequently Asked Questions About BDCs And Private Credit Risk
What Is A BDC?
A BDC, or business development company, is an investment vehicle that lends to or invests in private companies, often middle-market businesses that may not get financing from traditional banks. Investors typically use BDCs for income and exposure to private credit, but the risks depend heavily on the fund’s loan portfolio, leverage, manager quality and liquidity structure.
BDCs can be publicly traded or nontraded. Publicly traded BDCs trade on exchanges, so their share prices can move daily. Nontraded BDCs do not trade the same way and may offer only limited repurchase opportunities. That difference matters because investors may have very different liquidity experiences depending on the type of BDC they own.
Why Are Advisors Asking More Questions About BDCs Now?
Advisors are asking more questions because BDCs have grown quickly, credit conditions are becoming more complicated and some borrower problems have drawn attention to private loan exposure. When a category raises tens of billions of dollars, advisors need to know whether managers can still find enough attractive loans without lowering standards or crowding into similar deals.
The rate environment also matters. Many BDC loans are floating rate, so income can change as interest rates move. If clients bought BDCs mainly for high distributions, advisors need to explain whether those distributions are sustainable under different rate and credit conditions.
Are Nontraded BDCs Too Risky For Retail Investors?
Nontraded BDCs are not automatically too risky for retail investors, but they are not appropriate for every client. They may fit investors who understand private credit, can accept limited liquidity and have enough portfolio diversification outside the product. They may be less suitable for clients who need easy access to cash, cannot tolerate credit losses or do not understand how distributions can change.
Suitability depends on the client’s financial situation and the specific BDC. A smaller allocation inside a diversified portfolio may be reasonable for one client. A large concentration in a less-liquid BDC may be inappropriate for another. Advisors should avoid treating the product as a simple bond substitute.
What Should Clients Ask Before Buying A BDC?
Clients should ask what the BDC owns, how it generates income, how liquid the investment is, what fees apply, how distributions are covered and what happens if borrowers run into trouble. They should also ask whether the fund has exposure to weaker sectors, whether non-accruals are rising and whether the manager has ever reduced its distribution.
The most important question is how the BDC fits the client’s plan. If the goal is income, the client should understand that income can change. If the goal is diversification, the client should understand what risks the BDC adds. If the client may need cash soon, liquidity limits should be discussed before the investment is made.
Does A BDC Sell-Off Mean Private Credit Is Failing?
A BDC sell-off does not mean private credit is failing. Publicly traded BDCs can fall because of market sentiment, credit concerns, rate expectations, discounts to NAV or investor fear. Nontraded BDCs can face redemption pressure even when the underlying loan portfolio has not collapsed.
However, sell-offs and redemption pressure should not be ignored. They are signals that investors are reassessing the category. Advisors should use those signals as a reason to review fund quality, credit exposure, leverage, liquidity terms and client suitability instead of assuming every BDC faces the same risk.
Further Reading
Private Credit Market Raises Plenty Of Questions For Popular BDCs: InvestmentNews’ report on nontraded BDC sales, private loan exposure and advisor concerns around the category.
2025 Investment In Alternative Assets Surpasses $102 Billion Through July: Robert A. Stanger & Co.’s fundraising report showing nontraded BDCs leading alternative investment capital formation through July 2025.
Reuters Analysis Shows Publicly Traded Credit Funds Under Pressure: Reuters’ report on public BDC profitability, loan markdowns, leverage and broader private credit stress.
Blackstone BCRED’s Payout Cuts Show Private Credit’s New Test: Related NJ Financial News coverage on private credit distributions, redemption pressure and advisor communication.
