Optimized access to private credit: An index-based approach

Business Development Companies (BDCs) have become one of the primary public-market access points to private credit, particularly middle-market direct lending. As the private credit industry faces its first significant stress test after years of rapid growth, investors are increasingly focused on manager quality, underwriting discipline and income sustainability. Against this backdrop, the FTSE Private Credit BDC Composite Index combines listed and non-listed BDCs to provide a more complete representation of the investable private credit universe.

This index launch comes at an important moment: the private credit industry is experiencing its first large-scale stress test after years of rapid growth. Higher interest rates, concerns around software and technology lending, questions about valuation practices, and rising redemption pressures have exposed differences in manager quality and underwriting discipline.

In this paper, we examine signs of pressure emerging across the BDC market, including declining dividend coverage, NAV erosion and rising non-accrual rates. We also explore why the broader asset class remains supported by characteristics such as senior-secured lending structures, conservative loan-to-value ratios and strong income generation. The FTSE Private Credit BDC Composite Index seeks to balance the liquidity and transparency of listed BDCs with the valuation stability of non-listed BDCs.

Key takeaways:

• Private credit has grown into a mainstream asset class, with an estimated market size of $3.5 trillion. The FTSE Private Credit Composite Index provides a benchmark for measuring performance across some of its most prominent investment vehicles.
• The industry is facing its first significant stress period. Higher-for-longer interest rates, retail redemption activity, AI-related concerns and increased competition are placing pressure on spreads, underwriting standards and portfolio performance.
• Not all BDCs are performing equally. Investors need to be wary of metrics like distribution coverage, NAV trends and non-accrual rates.
• Listed and non-listed BDCs serve different purposes. Listed vehicles offer liquidity and price discovery while non-listed BDCs offer reduced volatility. Combining both into an index provides a balanced and comprehensive view of the market.

Points of differentiation: 

• First benchmark to combine listed and non-listed BDCs, providing broader representation of the investable private credit universe.
• Balances the liquidity and transparency of listed vehicles with the valuation stability of non-listed structures.
• Provides timely analysis as private credit faces its first significant market stress test.
• Incorporates a flexible hybrid weighting methodology that can be tailored to investor requirements.

What does our research mean for investors?

• Yield alone is not enough - Investors should move beyond headline yields. A BDC yielding double digits may appear attractive, but if distribution coverage falls below 100%, NAV is declining, non-accruals are rising, then that yield may not be sustainable. Investor should focus on the sustainability of income rather than simply the level of income.
• Manager selection matters more as private credit matures. Dispersion between managers shows that the market is transitioning from a period where “lenders could do no wrong” to one where underwriting quality becomes a major differentiator.
• Discounts to NAV may create opportunities if investors believe concerns are overblown
• A blended benchmark can provide a more comprehensive view of the private credit market by capturing the complementary characteristics of both listed and non-listed BDCs.