2024 BDC Outlook: Winter is Coming as the Golden Age of Private Credit May Be Snowed In By Mounting Challenges

This commentary reviews the 2024 outlook for Business Development Companies (BDCs) as markets shift over the next year and challenges arise on the Doppler radar.

Key highlights include:
-- 2024 will present challenges for BDCs which have been enjoying the warmth in a golden age of private credit as competition intensifies and profitability decreases from peak levels.

-- Consolidation in the BDC sector is expected to continue as advisors with multiple investment vehicles look to rationalize costs and compete in an increasingly scale-driven market.

-- Direct lending competition has compressed spreads and relaxed restrictive loan documentation from 1H23. We believe this trend will continue as some managers continue to raise significant dry powder to put to work.

-- We may see herd mentality on moving investments to non-accrual en masse if there are limited market repercussions, though we expect the industry average to peak at recent highs of ~4.5%.

-- Bi-lateral private placement issuance will be an attractive execution avenue for issuers with strong relationships with investors while market precedent pricing exists for relative value analysis.

“We expect BDC peak earnings of 2023 will be challenging to sustain through 2024 as base rates level off or decrease and credit spreads tighten to normalized levels from competition,” said Watson Tanlamai, CFA, Vice President – Global FIG.