Private credit avoids worst-case scenario as BDC results point to stabilisation

Private credit markets appear to have avoided the worst outcomes feared earlier in the year, according to Q2 results from major business development companies (BDCs), according to a Bloomberg report. Despite ongoing concerns over valuations and credit quality, these results suggest a more stable environment. Major BDCs, such as Ares Management, Blue Owl Capital, and BlackRock, have taken steps to strengthen their portfolios, including reducing leverage and limiting non-accruals.

This improvement is reflected in the BDC share prices, which fell to multi-year lows earlier this year. Blue Owl's co-president and head of credit, Craig Packer, noted that the second quarter was "much more stable" compared to the first, with an overall improvement in the investment environment. However, the recovery remains uneven, with limited evidence of a broader return to aggressive growth in direct lending.

Some large private credit managers are shifting towards higher-rated borrowers and larger financings, particularly in AI infrastructure. Despite these positive signs, Ares Capital, the largest publicly traded BDC, saw non-accrual loans rise 15% quarter-on-quarter to $708m, still below its historical average. Blackstone Secured Lending Fund recorded its largest quarterly decline in NAV in six years, while BlackRock's TCP Capital transferred 48% of its loan portfolio into a continuation vehicle backed by secondaries investor Pantheon.

Overall, the private credit sector is experiencing a period of adjustment rather than a full recovery, but large transactions remain active within the market.