Private Credit Warning: Most BDCs Turn Unprofitable in 2026, Reuters Finds

The majority of publicly traded business development companies (BDCs) — the only segment of the $3.5 trillion private credit industry that reports results in public view — have turned unprofitable, according to a Reuters analysis of balance sheet data that is now circulating as one of the clearest warning signs yet of stress building inside a market regulators have struggled to monitor in real time.

The finding matters well beyond the niche world of BDCs. Private credit has spent the past decade absorbing a role once held almost exclusively by banks, lending directly to mid-sized companies that either cannot access syndicated loan markets or prefer the speed and flexibility of a single relationship lender. Because most of that lending happens inside privately held funds with limited disclosure, listed BDCs function as the industry’s only real-time public window — and that window is now flashing red.

The Numbers Behind the Warning

Reuters, using standardized balance sheet data from S&P Global Market Intelligence, examined 53 publicly traded BDCs and found that average profits across the group fell to negative $7.6 million in the first quarter of 2026, down from a positive $26 million a year earlier, according to analysis published by The Canadian Vanguard. Twenty-eight of the 53 funds were loss-making on this standardized basis, compared with just 12 a year earlier and only 10 in 2024 — a near-tripling of loss-making funds in two years.

The S&P methodology, which was reviewed and affirmed by three academics, two industry analysts, and S&P itself, folds debt-servicing costs and mark-to-market changes in loan valuations into a single bottom-line figure — a more conservative measure than the “net investment income” metric BDCs typically headline in earnings releases. Leyla Kunimoto, founder of Accredited Investor Insights, described the pattern as fund managers marking assets down more widely than at any point in the current cycle, a shift she said would translate into lower returns for investors, according to Reuters’ original reporting.

The S&P BDC index has fallen 8.4% since the start of 2026, even as the broader S&P 500 climbed nearly 9% over the same period — a divergence that underscores how isolated the stress currently appears to be from the broader equity rally.

Software Exposure and the AI Disruption Angle

A meaningful driver of the writedowns traces directly back to the private credit industry’s concentrated exposure to mid-sized software companies — many of which are now facing competitive disruption from advances in artificial intelligence that are compressing software margins and, in some cases, entire business models. Blue Owl‘s OTF fund recorded a $490 million markdown in the first quarter alone, the largest since the fund’s creation, according to Reuters’ reporting carried by Investing.com.

This creates an uncomfortable irony for a sector that spent much of 2024 and 2025 marketing itself as a defensive alternative to volatile public markets. Private credit’s core pitch to investors was that illiquidity premiums compensate for reduced mark-to-market volatility. But because a substantial share of BDC lending flows to precisely the software companies most exposed to AI-driven disruption, the sector has effectively concentrated its credit risk in the same technological shift that is simultaneously inflating equity valuations elsewhere in the market — creating a scenario in which AI optimism lifts public tech stocks while AI disruption erodes private credit loan books built on older software business models.

The Off-Balance-Sheet Borrowing Problem

Beyond loan writedowns, the Reuters analysis identified a second, more structural concern: a sharp rise in off-balance-sheet borrowing. Of the BDCs examined, only 14 published complete data on their joint ventures — and among that smaller group, overall borrowing rose 80% across the whole of 2025 and a further 14% in the first quarter of 2026 alone, according to reporting from EU Today.

This borrowing occurs through complex debt structures that, while not necessarily violating any regulatory rule, allow funds to keep leverage off headline balance sheets and outside the reach of regulatory-required safety metrics. Separately, BDCs have leaned more heavily on payment-in-kind (PIK) income — arrangements where borrowers pay interest with additional debt rather than cash. PIK income accounted for 8.1% of BDC interest and dividend income on average in 2025, according to Fitch Ratings, up from 7.7% in 2024 and roughly double pre-2020 levels. Rising PIK usage is widely regarded within credit markets as an early indicator of deteriorating borrower quality, since it signals borrowers are increasingly unable to service debt with actual cash flow.

The Counterargument: Structural Resilience

Not every voice in the market treats the BDC data as a five-alarm warning. A defense of the sector published by law firm Dechert argues that BDCs are structured for long-term holding rather than redemption-driven liquidity events, and that their loan portfolios are concentrated in senior secured debt — the most protected position in any restructuring or bankruptcy scenario. Applying the worst historical default conditions from the 2008 financial crisis to the roughly $2.3 trillion private credit market of 2025 would imply losses of approximately 6% of total assets, a figure well below the losses implied by equity market corrections of similar severity.

That defense, however, does not fully address the specific findings in the Reuters analysis: the sharp rise in off-balance-sheet leverage and the concentration of losses in software-sector lending. Diversification requirements limit single-borrower concentration, but they do not eliminate sector-wide exposure to a technological disruption affecting an entire category of borrowers simultaneously.

What Comes Next for a Market Regulators Can Barely See

The core problem highlighted by this data is one of visibility rather than certainty. Regulators, credit rating agencies, and even sophisticated institutional investors have limited real-time insight into the roughly $2 trillion of private credit assets held in genuinely illiquid, non-listed fund structures. Listed BDCs, precisely because they report quarterly and trade publicly, are the closest available proxy — and that proxy is now showing measurable weakness at a moment when the broader private credit market continues to expand.

Whether the stress remains contained to software-exposed lenders or spreads more broadly will likely depend on two variables converging over the second half of 2026: how quickly AI-driven disruption reshapes mid-sized software company revenues, and whether refinancing conditions allow stressed borrowers to roll over debt rather than default outright. Both variables remain genuinely uncertain, which is precisely why credit analysts are treating the BDC data as an early warning worth monitoring rather than a settled verdict on the health of private credit as a whole.