The feedback loop between stale and often dispersed price marks and fund flows remains firmly in place. Redemption pressure in non-traded business development companies (BDCs), funds that invest in small and midsize private U.S. businesses, shows little sign of easing. Withdrawal requests from investors continue to exceed available liquidity, leaving managers reliant on caps and prorations. (In prorated redemptions, investors receive a fraction of their requested liquidity.) The basic dynamic is familiar: Redemption requests are fulfilled when inflows are sufficient to meet outflows, but once that balance breaks, liquidity has to be rationed.
The comparison with the non-traded real estate investment trust (REIT) episode of 2023 is useful, though not perfect. For private REITs, valuations can be supported by appraisals, long-term leases, rental income, cap-rate assumptions, and property-level fundamentals. Those marks can still be stale or optimistic, but the valuation process often moves more gradually.
For non-traded BDCs, the assets are mostly private loans to companies. The key question is more direct: Can the borrower keep paying interest and principal? If earnings weaken, interest coverage deteriorates, or the loan becomes nonaccrual (meaning no payment has been made for some period of time and the lender is no longer accruing interest), then the pressure can show up more quickly in income, marks, and net asset values (NAVs).
The 2023 episode showed that private REITs can withstand redemption cycles, provided asset quality, return stability, and investor confidence hold up. For non-traded BDCs, the task may be more challenging because private credit portfolios offer less scope to defer valuation adjustments and are more directly exposed to borrowers’ debt-service capacity. That puts greater weight on realized asset performance – and ultimately portfolio quality – from here.
On the public side, the picture has remained more stable. The median price-to-book ratio appears to have reached a local trough, suggesting the pace of derating – or lowering internal valuations – may be slowing (see Figure 1). But discounts remain wide, dispersion has increased, and the weakest names have continued to cheapen. The market is therefore no longer applying a simple macro discount. It is differentiating more sharply across managers, asset quality, and confidence in reported marks.
Figure 1: The price-to-book ratio for public BDCs appears to have reached a local trough
The capital structure performance of BDCs has also been telling. In our 27 April edition of The Credit Market Lens, we argued that the strong co-movement between BDC public equities and bonds was likely to weaken, with bonds outperforming in relative terms. That has now played out (see Figure 2). Equity investors have remained focused on the credibility of reported NAVs, while credit investors have been more willing to separate valuation uncertainty from default and recovery risk.
Figure 2: BDC bonds have outperformed equity in recent weeks
Source: PitchBook LCD and PIMCO as of 23 June 2026. BDCs are represented by the S&P BDC Index and investment grade (IG) credit is represented by the Bloomberg US Corporate Total Return Value Unhedged USD. Past performance is not a guarantee or reliable indicator of future performance.
To be clear, bonds are not immune to those concerns, but the transmission channel is less direct. Much of the repricing has already occurred, with many BDC bonds trading at spreads not far from the BB rated segment of the Bloomberg US Corporate index. From here, further material widening would likely require a more acute shock – most plausibly a reassessment of balance sheet liquidity risk among non-traded BDCs. For now, that risk appears manageable given structural guardrails, including redemption limits and access to bank credit facilities.
Fundamentals: Not breaking, not healing
Looking at the underlying portfolios of BDCs, the fundamental picture is not breaking, but it is not healing, either. Sequentially, conditions look broadly stable: The share of payment-in-kind (PIK) loans was essentially unchanged in the first quarter of this year, suggesting limited incremental stress for now (see Figure 3). Year over year, however, the trend still points to deterioration.
Figure 3: The share of PIK loans remains elevated
The more important signal continues to come from the marks. Dispersion remains elevated across lenders and, if anything, is higher among non-traded BDCs despite the perception of smoother reported performance (see Figure 4). Low time-series volatility alongside high cross-sectional dispersion is difficult to square with a common pricing anchor. It suggests NAVs are increasingly driven by manager-specific assumptions rather than a shared market-clearing level.
Figure 4: Dispersion in the marks remains elevated across lenders and is, if anything, higher among non-traded BDCs
That is where fundamentals and flows connect. Smoothed valuations can support reported NAVs in the near term, but they also reduce transparency and widen the confidence gap across managers. As confidence erodes, redemption pressure can intensify, forcing managers to raise liquidity – often by selling the most liquid or better-marked assets first.
Absent a clear moderation in outflows, financing conditions are likely to tighten further. That raises the probability that valuations eventually converge toward market-clearing levels – through NAV markdowns, wider secondary discounts, or realized losses.
Direct lending faces the cycle; ABF diversifies away from it
Notwithstanding the many fundamental challenges that will continue to pressure direct lending portfolios, the broader takeaway is that private credit is not a monolithic asset class. The stress emerging in parts of direct lending says something important about corporate credit exposure, but less about the full private credit opportunity set.
We continue to think asset-based finance (ABF), along with high quality consumer and mortgage credit, currently stands out on diversification and valuation. ABF cash flows are less directly tied to corporate earnings, and the collateral base spans residential and commercial real estate, hard assets, and other pools of contractual cash flows. That has historically made ABF generally less correlated with the corporate credit cycle and often supported by structural downside mitigation embedded in the underlying assets.
Unlike direct lending, which is predominantly non-investment-grade corporate risk, many ABF exposures have the potential to deliver investment-grade-like profiles. That makes them more capital-efficient for large allocators such as insurance companies and helps explain why the opportunity is anchored less in headline yield than in opportunities for resilience, diversification, and risk-adjusted returns.
