Credit funds have turned unprofitable for the first time in at least two years as falling asset values and rising debt costs squeeze returns, a Reuters analysis of S&P Global data shows. Across 53 publicly traded business development companies (BDCs)—the visible slice of the $3.5 trillion private credit market—28 were loss-making in the first quarter of 2026, compared with 12 a year earlier and 10 in 2024.
The shift marks a sharp reversal. Average profits across the group fell to negative $7.6 million in the first quarter of 2026 from $26 million a year earlier, according to S&P Global data reviewed and affirmed by three academics, two industry analysts, and S&P itself. The losses stem largely from writedowns on the value of loans, especially to software companies exposed to disruption from artificial intelligence advances.
BDCs are investment vehicles that earn money by collecting interest on loans they extend to mid-sized companies. Unlike the broader market, which rebounded strongly in early 2026, the S&P BDC index fell 8.4% since the start of the year while the S&P 500 climbed nearly 9%. The divergence underscores mounting stress in a corner of finance that has grown rapidly but now faces questions about asset quality and borrower health.
Debt costs have crept upward, with average BDC interest expense rising from around $23 million to roughly $28 million over the past two years. At the same time, funds have borrowed more through off-balance-sheet structures using special purpose vehicles and joint ventures—arrangements that boost reported income but can obscure true leverage. When adding these hidden borrowings back onto balance sheets, overall borrowing at 14 BDCs with complete disclosures grew 80% over 2025 and a further 14% in the first quarter of 2026, according to Reuters calculations.
Specific funds have reported steep markdowns. Blue Owl’s OTF fund took a $490 million markdown in the first quarter, the highest amount since the fund was created, while also recording a $100 million realized gain on investments. FS KKR reported realized losses of $195 million in the first quarter, the highest since 2024 and its second-highest ever. Crescent Capital BDC booked over $12 million in losses during that period, its highest since 2020.
The private credit market came under stress in part due to its sizable exposure to software companies disrupted by AI advances. Leyla Kunimoto, founder of Accredited Investor Insights and a private credit investor, said the markdowns signal broader reassessment across the industry. “It is a sign. Fund managers are marking assets down more widely than we’ve seen in this cycle. This will translate into lower returns for investors,” Kunimoto said. “This tells us that the entire universe is now re-valuing their loans.”
Jiří Król, global head of the Alternative Credit Council, emphasized that BDCs offer transparency advantages over traditional bank lending. “Investors in BDCs benefit from standardised and transparent reporting, particularly around portfolio assets, valuation, leverage and performance,” he said. “This transparency is much higher than that of bank balance sheets.”
Steve Novakovic, managing director of Educational Programs at the CAIA Association, flagged a separate concern: payment-in-kind (PIK) income, which adds debt to balance sheets while counting as earnings, rose to 8.1% of BDCs’ interest and dividend income on average in 2025, up from 7.7% in 2024 and double pre-2020 levels according to Fitch Ratings. “While PIK income may ultimately be earned by investors, it is non-cash income and can be an early indicator of eroding credit quality,” Novakovic said.
Sources
- Reuters — Analysis of S&P Global Market Intelligence data on 53 publicly traded BDCs, Q1 2026 profitability, asset writedowns, fund-level markdowns, and debt costs.
- S&P Global — Market Intelligence platform data on BDC financial metrics, profit figures, and asset valuation trends.
- Fitch Ratings — Payment-in-kind income trends in BDCs.
