Leveraging BDC Funds for Exclusive Access to the Private Credit Market

Institutional investors are driving exclusive access to differentiated investment opportunities through business development companies (BDCs). These vehicles, initially designed for retail buyers, have now become the gateway for institutional investors to tap into the thriving $1.5 trillion private credit market.[1] This shift is not merely a trend, it’s a transformative movement reshaping the investment landscape.

The Rise of Institutional Investors and BDC Funds

A recent report by Bloomberg highlights the growing adoption of BDC funds among institutional investors, including Oak Hill Advisors, Fidelity Investments, Jefferies Financial Group, and Churchill Asset Management. All of these financial giants have launched non-traded BDC funds in response to the increasing demand from institutional investors.

But why the sudden surge in BDC popularity among institutional investors? The answer lies in the dynamic nature of the private credit market. As private debt matured, more lenders emerged, creating opportunities for institutional investors. These investors were enticed by higher yields, generous allocations, swifter execution, and the promise of consistent risk-adjusted returns. Consequently, this surge in supply attracted borrowers and enticed private equity sponsors who sought alternative funding options for small- to mid-market deals.

A Decade of Unprecedented Growth

Over the past few years, asset managers have recognized the potential of BDC funds and launched additional non-traded BDC funds to enhance direct lending platforms. These non-traded BDC funds have seen significant growth, with loan assets rising 41% to $119.9 billion and interval funds surging 36% to $10.3 billion. In comparison, publicly traded BDC funds experienced more modest growth, with loan assets increasing just 4% to $114 billion. As a result, loan assets of non-traded BDC funds now exceed those of publicly traded BDCs.

At the same time, the past decade has seen the private credit sphere swell to an astonishing $1.5 trillion. This growth has been fueled by favorable conditions for riskier borrowers and low-interest rates. The reluctance of traditional banks to finance caused buyout firms to explore alternative funding options, including BDC funds. Now, however, the tide is turning as borrowers grapple with rising interest payments.

Dwayne Hyzak, CEO of Main Street Capital Corporation, underscores the importance of BDC funds in this rapidly evolving landscape: “BDCs have the flexibility to make investments that may be difficult for traditional banks to execute due to the leveraged lending limits and other restrictions banks have to comply with in their lending practices,” Hyzak says. “As banks continue to pull back from the middle market, it increases the BDC industry’s opportunity to provide the same types of debt financing historically provided by traditional commercial banks.”[2]

Unlocking the Potential of SMBs

BDC funds present a unique vehicle for institutional investors to access the potential of small- and medium-sized businesses (SMBs). What’s more, because of their distinct regulatory environment, potential tax advantages, and balanced risk and reward profiles, BDC funds are an attractive choice for investors looking to diversify their portfolios.

With close to $300 billion in assets, BDC funds are an important source of private credit funding, alongside middle-market CLOs and private credit funds. BDC assets have expanded rapidly in recent years, in line with the growth of the private credit market. In the first quarter of 2023, for example, the value of BDC asset portfolios surged 22% to reach $292 billion. This growth can be primarily attributed to the expansion of the private credit market. Despite challenges in the credit environment, investors continue to flock to private credit and BDC funds, providing an alternative avenue of funding for borrowers.[3]

Continued Market Share Takeover

Assuming no major setbacks, BDC funds appear well-positioned to continue doing what they’ve excelled at since the global financial crisis: taking share from traditional banks. This shift is not only beneficial for institutional investors but also for the private credit market’s overall health.

To sum up, institutional investors are increasingly turning to BDC funds to access the lucrative private credit market. Against a promising backdrop of growth and flexibility, BDC funds are reshaping the investment landscape, offering institutional investors the exclusive access they desire in today’s evolving financial ecosystem.

This is exactly why the importance of BDC funds in institutional investment strategies cannot be underestimated, and why it is vital to stay aware of the latest developments in private credit.

One way to do this is with the IVP for Private Funds platform. This comprehensive solution provides the right mix of capabilities to launch and manage complex BDC funds with exceptional efficiency and robust support for deal tracking, capital structure management, portfolio management, risk assessment, reporting, pre-and post-trade compliance, and more.

Learn more about the IVP for Private Funds platform or contact us to set up a live or online demo.

1. “Banks Rush to Gain Foothold in $1.5 Trillion Private Credit Market,” Bloomberg, September 2023
2. “How Well Are BDCs Navigating the Challenges,” Private Debt Investor, March 2023
3. “Credit Trends: Business Development Companies’ Assets Provide A Glimpse Into The Private Credit Market,” S&P Global Ratings, October 2023