By Al Root
Private credit has been causing nothing but consternation. Investors looking for higher yields should consider business development companies, the publicly traded version of those funds anyway.
Wading into the private-credit crisis to pick up higher-than-average income might seem risky, but a little care can go a long way. Business development companies, or BDCs, are a little like real estate investment trusts. They pay out most of their taxable income to investors, avoiding corporate taxes along the way. Instead of owning real estate, however, BDCs invest in and lend to small private companies.
The sector has hit some turbulence lately. Coming into the week, the Putnam BDC Income and VanEck BDC Income exchange-traded funds were both down 19% and 22%, respectively, over the past year. Declines, however, left both funds with sky-high yields of 11% and 13%, dwarfing the Schwab U.S. REIT ETF's 3.4% and the Schwab U.S. Dividend Equity ETF's 3.3%. (The S&P 500 currently yields a paltry 1.2%.)
High yields are often a sign of trouble. It isn't hard to suss out the problem with BDCs. Investors have lost confidence in private-credit markets, the $2 trillion segment of the lending market where nonbanks lend directly to businesses, and that has led to accelerated requests for redemptions from nontraded BDC-sponsored investment vehicles, creating a dreaded bank-run-like spiral, and forcing some of these funds to limit redemptions.
It has been a scary few months, but the worst may be over. The two BDC ETFs are up roughly 5% from 52-week lows, reached in March and April. The Morningstar LSTA U.S. Leveraged Loan index, a measure of credit health, has also started to recover, says Wedbush analyst Henry Coffey.
"March-quarter earnings were [also] more reassuring than the stock prices suggested," he added, noting that only 12 of the 48 BDCs he looked at cut their dividends during the quarter. That isn't exactly what investors want to hear, but credit delinquencies were stable, and problems were mainly market-related, not credit-related.
Still, sifting through BDCs for winners feels like a dangerous business right now. Coffrey offers help. He found six that "offer exceptional dividend durability."
They are Ares Capital, which targets senior secured loans for companies with established private-equity sponsors; Hercules Capital, which pursues a similar strategy, focusing on tech companies; Fidus Investment, which typically targets companies with sales between $10 and $150 million; Gladstone Capital, which executes a similar strategy while avoiding the tech sector; Blue Owl Capital, which is a large, diversified alternative-asset manager; and PennantPark Floating Rate Capital, which provides floating-rate secured loans for companies with private-equity sponsors. The six yield an average of 10.9%.
There are risks. Payout ratios are high, but that's the nature of the business when a company pays out its profits to investors. Investors should realize that BDC dividends can fluctuate, and investors should watch credit quality and the direction of interest rates for indications of where they may be headed. Falling rates, in particular, can put pressure on interest payments to BDCs, though that's not much of a worry right now.
Coffrey believes net income will cover payouts, adding that the six management teams are time-tested. Wall Street aligns closely with his views: The average Buy-rating ratio for the six is about 81%, well above the 55% average for companies in the S&P 500.
Wall Street ratings aren't a guarantee of future success, but in trying times, there can be safety in crowds.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 21, 2026 01:30 ET (05:30 GMT)
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