Major private credit and business development companies (BDCs) have seen their shares pull back sharply over the past week, as investors recalibrate expectations for Federal Reserve policy. The shift follows stronger-than-expected jobs data and sticky inflation, which have pushed the probability of a rate hike at the next FOMC meeting to over 80% on prediction markets like Polymarket and Kalshi, and to 85% on CME's FedWatch tool.
Blue Owl Capital (OWL) has been among the hardest hit, closing last week at $10.56—down 56% from its January 2025 peak. Its market capitalization has shrunk from $40 billion to $16.4 billion. KKR, which has expanded heavily into private credit, ended at $101, off 13% from its August high. Apollo Global Management, Blackstone, and Ares have also recorded notable declines. The VanEck BDC Income ETF (BIZD), which tracks major BDCs including Ares Capital, Main Street Capital, and Hercules Capital, fell to $13, down more than 4% from its August peak.
The selloff reflects a nuanced market view. In theory, higher rates should benefit private credit lenders, since most of their loans carry floating rates tied to SOFR. As rates rise, the interest income on those loans increases, potentially boosting earnings. However, the market is focusing on the longer-term risks: sustained high rates can strain the cash flows of portfolio companies, especially smaller and mid-sized firms that rely on variable-rate debt. Additionally, rising crude oil prices—gasoline has climbed to $4.31 per gallon and diesel to a record $6.10—are adding cost pressures across the economy.
These dynamics have led to a wave of investor redemptions from private credit funds, including those managed by Blue Owl, Apollo, and Morgan Stanley. The combination of higher borrowing costs and input price inflation raises the risk of higher default rates in the coming quarters. For BDCs, this could translate into mark-to-market losses on their loan portfolios and, in a worst-case scenario, dividend cuts.
Some analysts argue that the current pullback may be overdone. They point out that if the Fed hikes but economic growth holds up, BDCs' floating-rate coupons will reprice upward, while credit losses may lag, creating a delayed earnings rebound. This view supports a contrarian buy on names like Ares Capital (ARCC) and Main Street Capital (MAIN), which have historically managed credit risk well. However, the key risk remains that sustained high rates and oil-driven stress could break the cash flows of portfolio companies, forcing dividend reductions and deeper valuation cuts.
For investors looking to gain exposure without single-name risk, the VanEck BDC Income ETF (BIZD) offers diversification across multiple BDCs. This approach can mitigate the impact of any one company's default, while still benefiting from the floating-rate model if spreads hold. Yet, if defaults rise faster than spreads can offset, the entire BDC complex could face headwinds.
The broader market context is also important. Rising yields and oil prices have pressured equities globally, as seen in recent moves in Asian and European markets. The KOSPI's drop below 7,000 highlights how higher energy costs and yields are affecting risk assets. Meanwhile, some analysts see the current environment as a potential catalyst for rate-sensitive stocks if the Fed's next move is fully priced in.
Looking ahead, the Fed's decision will be pivotal. If the central bank hikes and signals a pause, private credit stocks could stabilize. If it hikes and hints at more to come, the selloff may deepen. The interplay between rates, oil, and credit markets will remain a key theme for investors in this sector.
This article is for informational purposes only and does not constitute financial advice.
