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News Analysis
BDCs make sales to rebalance portfolios and create liquidity
by Lisa Fu
As concerns about liquidity and credit quality mount in private credit, some direct lending vehicles are considering offloading selected assets.
Business development companies (BDCs) have found themselves in the eye of the storm. These funds, which are pitched at individual investors, are now facing redemption requests and share price pressure as dividends falter and the focus shifts to credit risks.
The turnaround is throwing up challenges for managers, who are increasingly looking at asset sales. Such actions were not part of a credit playbook based on originating loans and holding them to maturity. However, selling at the right price can rebalance a portfolio, generate liquidity and reduce the risk of being overexposed to a particular sector, according to credit industry sources.
“It’s hard to say there’s a thematic reason for wanting to do these asset sales,” said Watson Tanlamai, vice president for global non-bank financial institutions at Morningstar DBRS. “But I do think you’re likely to have them when you’re capital-constrained or you have concentration risks.”
Software industry disrupted
Risk aversion has spiked this year after reports about AI disruption zeroed in on the software industry, which has been a major recipient of private credit. In the ensuing fallout, alternative asset managers have seen their share prices tumble as fund investors looked, sometimes in vain, for the exits.
Last month saw a pair of significant loan disposals. Blue Owl sold USD 1.4bn of assets from across its three BDCs to institutional investors, while publicly traded fund New Mountain Finance offloaded a USD 477m portfolio.
By selling, Blue Owl aimed to return capital to investors in its non-traded BDC, which faces an end date. Meanwhile, New Mountain Finance cited a desire to diversify its portfolio and reduce exposure to payment-in-kind agreements, in which deferred interest is consolidated into the debt. Blue Owl got a sale price at 99.7% of par and New Mountain Finance struck a price at 94%.
Some BDCs may be trying to limit their exposure to software
Larry Herman
Managing director
Raymond James
Other players are also eyeing a reset. FS KKR told shareholders in an earnings call it was considering selling some positions for risk management or accretion purposes. Market sources say other BDCs are likewise mulling sales. While these are not usually publicised, a deal struck at a good price could actually highlight the quality of the asset marks and underwriting, some credit sources say.
“A publicly traded BDC has no inherent liquidity requirement,” said John Mahon, partner at Cleary Gottlieb. “But there are situations where you may decide from a portfolio structuring perspective that it’s appropriate to rebalance.”
Selling loans or positions can help a BDC rotate out of industries or geographies. “My guess is some of the BDCs may be trying to limit their exposure to software, so you have further diversification in the portfolio,” said Larry Herman, managing director at Raymond James. “I don’t see this as a bad exercise.”
The broadly syndicated loan market has seen a sell-off in technology names that have yet to bounce back, and direct lending has been similarly plagued by valuation worries.
In some cases, managers may aim to trim lower-yielding loans or target preferred equity or common equity positions inherited after a restructuring.
Subordinated debt and preferred equity accounted for 22% of the investments that New Mountain Finance agreed to sell, while PIK assets made up 37%, based on figures in an earnings presentation.
In some cases, BDCs may need to bring non-qualified assets back within the permitted 30% of a portfolio by selling assets such as equity positions, said Jeffrey Griffiths, global head of private credit at Campbell Lutyens.
Seeking dilution
Diluting overly concentrated lending could be a major impetus for sales, as BDCs with a 4% to 5% exposure to a specific ticket seek to trim the figure to around 1%, according to Tanlamai at Morningstar DBRS.
Overexposure can prove costly. At BlackRock TCP, six portfolio companies accounted for around 67% of a drop in net asset value (NAV) in the final quarter of last year, CEO Philip Tseng said in an earnings call, after the BDC’s value was slashed by 19% to USD 7.07 per share.
BDCs that are not publicly traded, whether closed-end or perpetual funds, can sell assets to repay investors. This was the case with Blue Owl seeking to wind down its non-traded BDC after dropping plans to fold it into another investment vehicle.
Average redemptions in semi-liquid BDCs rose to 4.4% of NAV in the fourth quarter of 2025 from 1.6% in the prior quarter, according to a Fitch report.
