Ignoring Reality or Overreacting? Semiliquid Funds Versus BDCs

Private credit, an asset class the financial industry is keen on selling to the masses, comes in two parallel universes, but returns in each have differed dramatically in 2025.

In one universe live the listed business development companies, or BDCs, which are investment funds that lend to small- and medium-sized businesses. In the other reside semiliquid funds (including unlisted BDCs), which often employ similar lending strategies, but in more restrictive structures.

There is substantial holdings overlap between the universes’ funds, so why are their returns so different? Thank that pesky feature of listed BDCs: They trade throughout the day.

Investors can sell listed BDCs on demand, albeit with the risk of not being able to sell at the fund’s net asset value. Or they can sell at NAV, but only a few times a year, in a semiliquid fund.

As shown in Figure 1, some prominent listed BDCs are down more than 20% year to date through Oct. 28, suggesting that investors expect big credit problems. However, their semiliquid counterparts—offered by the same asset managers and which own a lot of the same companies—show no such signs of stress, though their reported returns are lagged.

In both universes, fund managers have a lot of control over portfolio valuations because the funds’ underlying holdings are illiquid and have few observable trading prices. This isn’t a question of semiliquid fund managers being more or less aggressive with their valuations, though. Listed BDCs are trading below their NAVs, meaning that they haven’t written down their holdings, either. The performance divergence reflects a difference of opinion on portfolio values between the market and fund managers of both listed BDCs and semiliquid funds (who are often the same people). Essentially, the market is saying fund managers are overvaluing these private credit portfolios.

Is the market overreacting? Is this an early sign of trouble for semiliquid private credit funds? Or is the truth somewhere in between?

How Different Are the Portfolios?

Virtually, all BDCs and many semiliquid funds focus on private credit. These funds’ managers often boast of their “proprietary” loan origination abilities, that is, their access to exclusive lending opportunities that their peers lack. The performance of listed BDCs, they may argue, therefore, has little relevance to their semiliquid funds, as each portfolio is supposedly unique.

Is that true? I looked at five prominent listed BDCs’ portfolios, including BlackStone Secured Lending Fund BSXL, BlackRock TCP Capital Corp TCPC, FS KKR Capital Corp FSK, Carlyle Secured Lending CGBD, and Crescent Capital BDC CCAP. All are down significantly year to date, three of which have fallen 20% or more. As shown below, the companies those five BDCs own are widely held by semiliquid funds. In fact, nearly $60 billion of semiliquid fund assets are tied to companies held in at least one of those BDCs.

It is no surprise that BlackStone Private Credit, Crescent Private Credit Income Corp, BlackRock Private Credit, and Carlyle Tactical Private Credit (all either unlisted semiliquid BDCs or interval funds) have the highest exposure to the five listed BDC portfolios. After all, BlackStone, Crescent, BlackRock, and Carlyle manage four of the five BDCs in this analysis. These companies allocate many of the same deals to both their semiliquid funds and listed BDCs.

However, even some of the largest semiliquid funds with no connection to any of the listed BDCs often had a third or more of their net assets in companies held by just the five BDCs. Private credit may not be as “private” as it’s portrayed, as this analysis examined just five listed BDCs totaling just over $15 billion in net assets. Looking at more BDCs or fellow semiliquid funds would likely show much more overlap.

BDCs Typically Trade Below NAV

Most listed BDCs, like other closed-end funds, trade below their NAVs. As shown in Figure 3, over the past 20 years, the typical BDC traded at a discount of roughly 6.6% to its NAV, though the average discount was much lower when the market anticipated significant credit issues. Yet, when the average BDC traded below a 20% discount, it typically quickly recovered, even in the depths of the global financial crisis and March 2020’s covid-induced drawdown.

BDCs trade below NAV for a few reasons. First, they must pay 90% of their earnings out as dividends; occasionally, some make distributions in excess of their income. This means part of their “return” can just be a return of capital, which dilutes the fund’s NAV. Additionally, the fund companies often value their illiquid, private holdings themselves and share little information about the process, so investors discount their prices to reflect the lack of information.

What Do the NAV Discounts Imply About Future Credit Losses?

BDCs typically use leverage to boost returns, but this also magnifies losses and causes BDCs to trade at steep discounts when credit concerns arise.

What does the average 16% discount to NAV imply about the market’s predictions for future private credit losses? Let’s assume 5% of that discount is from the above-mentioned dividend and information issues. The remaining 11% discount implies that the market expects the average NAV to erode by 11% due to credit losses. Assuming a 1:1 debt/equity ratio (roughly the average amongst listed BDCs), this implies 5.5% credit losses. How do you get to 5.5% losses? Loans can default, but BDCs can recover some of their capital in bankruptcy proceedings since most of their loans are senior in the capital structure.

The figure below shows the loss to shareholder equity (or NAV), given different default and recovery assumptions and a 1:1 debt/equity ratio. A 16% discount implies 10%-15% defaults with 40%-60% recovery rates. Based on that, the market isn’t predicting some horrible private credit crash but does suggests some cracks may appear.

What’s an Investor to Do?

You can draw two conclusions from this information. The first is that, given the wide portfolio overlap and a belief in an efficient market, semiliquid funds are overvalued and likely will see writedowns in the 10%-15% range, and you may want to get out before any potential markdowns. The snag, however, is semiliquid funds only allow investors to redeem a percentage of shares each repurchase date; if too many other investors have the same idea, you may not be able to get your full redemption amount.

The second conclusion is that the market is not so efficient, and it has overreacted to credit threats in listed BDCs. The snag here is that no one really knows if the portfolios are undervalued (which is why BDCs typically trade at discounts in the first place), as there is very little public information available about their underlying holdings, let alone any transaction prices for them.

Ultimately, if you believe in private credit and think that the doomsdayers (and the market) are crying wolf, then this should be a good buying opportunity for the listed BDCs. Otherwise, it points to the conclusion that semiliquid funds’ infrequent pricing is not a bug, but instead their main feature.