How I Made $5000 in the Stock Market

BDCs Yield 10% or More. They May Be Worth the Risk.

Oct 10, 2025 15:57:00 -0400 by Andrew Bary | #Financials #Feature

Business development companies, including those run by Blackstone, make secured, high-rate loans to companies valued at less than $5 billion that have been taken private in leveraged buyouts. (Michael Nagle/Bloomberg)

Business development companies are worth a look, especially given that most now trade for considerably less than the value of their assets.

Key Points

Business development companies have tumbled in recent weeks and now offer some of the highest yields in the stock market. For investors with tolerance for risk and volatility, BDCs offer plenty of income and capital appreciation potential.

Despite their names, BDCs generally aren’t incubators of start-ups or newly public companies. Instead, they tend to make secured, high-rate loans to smaller companies valued at less than $5 billion that have typically been taken private in leveraged buyouts. They pass nearly all their income to investors.

Their structures allow them to avoid corporate taxes, similar to how real estate investment trusts do, but their dividends are usually taxed as ordinary income for individual investors. Ares Capital is the largest, with a $14 billion market value, while other sizable BDCs include Blue Owl Capital, Blue Owl Technology Finance, Blackstone Secured Lending, FS KKR Capital, and Morgan Stanley Direct Lending Fund.

The group, however, has fallen on hard times. The VanEck BDC Income exchange-traded fund is down 15% since mid-September to under $14—it hit a new 52-week low on Friday—and now yields almost 12%. Many individual BDCs now yield more than 11%, with the depressed FS KKR yielding 19.5%. With yields like that, the group is worth a look, especially given that most now trade for considerably less than the value of their assets. BDC stock prices are volatile because the market is dominated by individuals. Income-oriented mutual funds shy away from the sector due to a rule that requires them to include BDC fees in their own fee calculations.

The timing of the BDC selloff may provide a clue to what has spooked investors. It began in mid-September when the Federal Reserve cut its key short rate by a quarter point to a range of 4% to 4.25%. The vast majority of BDC loans float at a yield premium above short rates, making their returns vulnerable to lower short rates. That prompted concerns about widespread dividend cuts over the next year if the Fed cuts short rates by another percentage point, as the markets now expect.

The BDC dividend-cut issue is a real risk, notes KBW analyst Paul Johnson, who cites the prospect of lower rates and tighter spreads on new loans amid keen competition to make them. “Only a handful of BDCs will not have to reduce dividends over the next year,” he wrote recently. The best guess is that BDC dividends on average could drop by a percentage point or more over the next year. That would leave them with still-ample payouts.

The BDC selloff could also be flashing a warning sign about the health of the $1 trillion private credit market, which has mushroomed in recent years. The market is a focus of alternative-asset managers such as Blackstone, KKR, and Apollo Global Management. What makes the BDC drop somewhat perplexing, however, is that other parts of the high-yield credit markets remain strong, unlike the situation in April when everything sold off.

“We believe a good investment opportunity has opened up in private credit, via discounted, listed BDCs from leading private credit managers,” says Julian Klymochko, CEO of Accelerate, a Canadian financial services firm that follows the BDC market.

“A lot of people are scratching their heads. Nearly every other measure of credit conditions is looking good—high-yield corporate credit spreads, the broadly syndicated loan market, and regional-bank stock prices,” he says.

What’s more, the credit performance of BDCs has been strong, with some exceptions, like FS KKR, that saw an uptick in problem loans in the second quarter. The coming BDC third-quarter earnings reports will be closely watched for credit trends.

“We are surprised by the trading levels,” says Craig Packer, co-president of Blue Owl Capital. “Both of our funds are performing very well from a credit and dividend perspective.”

Accelerate’s Klymochko says investors should think of BDCs as the “senior tranche” of private equity since they make secured loans backed by companies controlled by PE firms. BDCs are probably superior investments to the private-equity funds now pitched to retail investors, thanks to their high yields and seniority relative to equity investors.

The negatives with BDCs include leverage—most funds use a dollar of debt for each dollar of equity. That magnifies risk and volatility relative to junk-bond and leveraged loan funds that use little or no leverage. BDC fees are high and can run at 4% or more annually of net assets. Since private-credit loans generally don’t trade, values are estimated quarterly, raising the risk that portfolios get marked too favorably.

Investors can avoid these issues by looking at alternatives that have lower yields but carry less risk due to lower or no leverage. These include closed-end junk funds like BlackRock Corporate High Yield, now yielding close to 10%, and leveraged loan ETFs like and Invesco Senior Loan, which yield around 7%.

Investors, however, rarely get a chance to buy BDCs with yields this high and prices this low. The last time was in late 2022 and that was a buying opportunity.

Klymochko says the median BDC in his coverage of 42 companies is trading at a 20% discount to the most recent portfolio values on June 30. He says BDCs have had very strong performance over the past 15 years when discounts got to 20%, returning 40% on average over the next year. That kind of gain seems unlikely this time, but even half that amount would be a nice return.

Investors should consider BDCs trading at a discount to net asset values and those with a large proportion of high-quality senior secured loans, while avoiding funds with high levels of subordinated debt, preferred stock, or common equity in portfolio companies. The VanEck BDC ETF offers broad exposure with a modest annual fee of about 0.4%.

The Blue Owl Capital and Blue Owl Technology BDCs have strong credit records and are deeply discounted. They trade at $12.23 and $13.68, respectively, with 15%-plus discounts to net asset value. They yield 12.1% and 10.2%, respectively. Blue Owl Technology was converted from a private fund earlier this year. Tech loans are popular with BDCs due to high yields and Blue Owl Technology is one of the few focused on the area.

The Blackstone Secured Lending BDC, which yields more than 12%, has over 95% of its portfolio in first-lien senior secured loans, the highest-quality BDC loans, and has among the lowest levels of nonaccrual loans at well under 1%. Nonaccrual loans are those on which payments haven’t been made for at least 90 days. The Blackstone BDC trades around $25, at a 7% discount to net asset value after commanding a 20% premium earlier this year. Similarly, the Morgan Stanley Direct Lending, at $16, trades at a discount of 20% to its net asset value and has a 12.3% yield. It has about 95% exposure to first-lien senior loans and minimal nonaccruals.

Raymond James analyst Robert Dodd upgraded Blue Owl Capital and Morgan Stanley Direct Lending to Outperform from Market Perform this past week, citing “attractive valuations” after the recent selloff.

Klymochko highlights Palmer Square Capital, a small BDC that focuses on more liquid, broadly syndicated loans to larger companies than those targeted by most BDCs. The Palmer Square BDC trades around $12, a 21% discount to its Aug. 31 portfolio value, and yields over 11%. Another plus is a lower fee structure than other BDCs. The big discount may reflect the BDC’s exposure to First Brands, the auto-parts maker whose collapse has reverberated around Wall Street. But the holding isn’t large—it was under 2% on June 30—and seems to be reflected in the pullback in the stock.

The FS KKR Capital BDC has been among the bigger BDC casualties in the past few months. Its stock is down by over a third since July, to $14. It now trades for a steep 34% discount to its June 30 net asset value and yields 19%. Shares came under pressure after nonaccrual loans ticked up to over 5% of the portfolio in the second quarter, helping prompt a 5% drop in its asset value. Investors are concerned about further erosion in credit quality and a dividend cut in the next few quarters. But a lot of bad news is reflected in its depressed stock price.

That’s true for most of the sector—and an opportunity for those inclined to high yield with a side order of risk.

Write to Andrew Bary at andrew.bary@barrons.com