BDC Q2’26 Review: Redemptions Exceed Gross Equity Capital Raised; Funds Increased Borrowings Slightly and Relied on Cash Stockpiles; Net Lending Activity Declined; Public BDCs Reduced Net Leverage

Credit Research: Mark Fischer

Relevant Documents:
Octus’ BDC Database
Link to Financial Summary by BDC for Q2’26

Key Takeaways

• Business development companies experienced a $1.3 billion outflow of capital in the second quarter as redemptions exceeded gross equity raised. Redemptions across all BDCs increased to $8.6 billion in the second quarter, exceeding gross equity raised, which totaled $5.2 billion, down by more than 50% sequentially. Redemptions were greatest among funds managing more than $5 billion of assets, funds focused on the upper middle market as measured by borrower EBITDA, and funds with higher than average software exposure.
   
• Funds relied on debt, which increased slightly, and cash stockpiles lifting leverage to 0.91x, up from 0.89x across all BDCs. Publicly traded BDCs’ net leverage declined to 1.09x from 1.13x. A number of BDCs discussed keeping leverage below targeted ranges and funds paid down debt during the second quarter.
   
• Following cuts to dividends announced in the first quarter, BDCs improved cash flow during the second quarter. More than half of BDCs generated cash from existing portfolio investments that exceeded dividends paid for the first time since Octus began tracking.
   

This article is a bottoms-up analysis of the business development company, or BDC, sector, covering approximately 175 BDCs, which, combined, have over $540 billion of mostly sponsor-backed private credit investments measured at cost. BDCs analyzed include funds that have both private and public equities. Types include publicly traded BDCs, nontraded BDCs and private BDCs.

In this quarterly analysis, Octus focuses on BDC financials including capitalization and cash flow of the companies. Our analysis includes changes in debt and equity, changes in investing activities and cash flows of the existing portfolios, converting reported yields to cash flow yields and examining companies’ ability to pay cash dividends and means of financing new investments. Additionally, we break out BDCs by assets under management, type, target borrower by EBITDA and level of software exposure.

Summary statistics for the BDC sector in the three months ended June 30, March 31 and the 12 months ended Dec. 31, 2025, are below:

We discuss each of these below, but some quick takeaways from the table above include:

• Stated investment yields stabilized in the second quarter, but cash yields were lower in the second quarter as a result of timing issues. PIK income as a percent of reported has hovered around 7%.
   
• Significant cuts to dividends made by BDCs improved the cash profile of a number of funds. The percentage of funds with cash flow exceeding dividends was, for the first time since we began tracking, more than half of BDCs analyzed.
   
• Net investment activity turned negative in the second quarter because of an outflow of equity capital from persistently high redemptions which exceeded new equity raised.
   
• In order to offset the equity cash outflow, funds turned to debt and existing cash stockpiles causing leverage to increase to 0.91x across the BDC industry.
   

The full list of BDCs and cash flow calculations is below. The list can also be downloaded HERE.

(Click HERE to enlarge.)

Change in Assets and Liabilities

Business development company assets under management, as measured by cost, increased by approximately $2.5 billion sequentially in the second quarter ended June 30. However, the increase was largely due to the inclusion of new BDCs into our dataset.

By category, a number of fund types had sequential declines including: (i) large funds, with greater than $5 billion of assets under management; (ii) publicly traded BDCs; (iii) funds focused on the upper middle market; and (iv) funds with significant software exposure.

As compared with the first quarter, redemptions increased marginally and new equity raised fell sharply, resulting in net equity raised turning negative in the second quarter. Funds, both public and private, have consistently relied on new equity capital to increase assets. However, gross new equity raised across all BDCs in the second quarter fell by almost $6 billion to $5.2 billion.

Redemptions also ticked higher in the second quarter to $8.6 billion. However, since redemption requests largely exceeded 5% caps in the first quarter and remained above those caps in the second quarter, the sequential increase was manageable.

To offset the equity outflows, funds increased the amount of new debt raised in the second quarter. Cash balances also fell sequentially.

BDCs with assets over $5 billion and funds more exposed to software investments received elevated redemption requests in both the first and second quarters.

As discussed below, although nontraded and private BDCs largely have limits for redemptions of 5% of outstanding shares, the redemptions that were actually paid out still exceeded new equity capital raised in the second quarter, resulting in outflows of capital and funds relying on cash from existing portfolio assets to fund redemptions.

(Click HERE to enlarge.)

At the time of writing, a handful of BDCs have reported redemption requests for the third quarter, with trends largely continuing into the quarter. Blackstone Private Credit Fund and Cliffwater Corporate Lending Fund each reported double-digit requests for tenders by investors.

While certain non-traded BDCs relied on new debt to help fill the hole left by redemptions, a number of publicly traded BDCs in the aggregate focused on reducing leverage during the quarter using cash generated from their existing portfolios to pay down debt rather than reinvest the capital into new loans.

Although publicly traded BDCs’ leverage, as measured by net debt divided by equity, still ended the quarter higher than other types of BDCs, companies used cash harvested from portfolios to reduce debt in the quarter, reducing leverage from 1.13x as of March 31 to 1.09x as of June 30.

On a call to discuss second-quarter results, Goldman Sachs BDC said that the company was focused on bringing leverage down, “particularly post-quarter-end.” The company said that at quarter-end, leverage was 1.35x but that because of some post-quarter repayments, it was closer to a range of 1.2x to 1.25x as of Aug. 6. Similarly, Blackstone Secured Lending’s leverage decreased slightly on a sequential basis but remained near the upper end of its targeted range of 1x to 1.25x.

Change in Fair Values

Fair values as a percent of cost again fell sequentially in the second quarter, albeit at a slower pace than in the first quarter, across most BDC types, with the exception of funds with less than $1 billion of assets under management. Largest declines were seen in BDCs managing more than $5 billion assets, those BDCs exposed to the upper middle market (as measured by EBITDA target) and funds heavily exposed to software loans.

Rather than widespread declines across all loans, a number of sharp declines of broadly syndicated loans held by BDCs in the first quarter drove reductions across BDCs.

In our second-quarter analysis of large fair value declines across borrowers, Octus compared the 25 loans each quarter that contributed to declines sequentially in the first and second quarters. In the first quarter of 2026, broadly syndicated loans, or BSL, accounted for 56% of the top 25 loan decliners by count. However, in the second quarter, BSL names fell to just nine by count, representing 31.9% of total principal, while private credit names climbed to 16 by count, or 68.1% of the total principal. While this shift could reflect a case of private credit valuation “catching up” to the BSL market, average declines in private credit pricing were not as large as declines seen in the BSL market.

Reasons for the decline were mixed, with Ares Capital Corp, Sixth Street Specialty Lending and Blackstone Secured Lending all reporting broad-based spread widening contributing to the declines in fair value. Blue Owl Capital Corp. on the other hand blamed reductions in fair values on one credit. During the quarter, Blue Owl Capital changed the status of its holdings in Loparex to nonaccrual. Loparex subsequently entered into a recapitalization transaction in September.

Cash Flow and Dividends

BDCs reported annualized income yields of 9.6% in the second quarter, flat to first-quarter results. Removing noncash income from accretion of new issue discounts and reducing reported interest by PIK dividend results in annualized cash yields of 8.3%, which is down from 8.6% BDCs reported in the previous quarter.

However, the decline is due to working capital timing, when portfolio companies pay cash interest, and was caused by a swing in the reported interest receivable reporting item. Major sources of noncash income, accretion of debt discounts and PIK income were flat to marginally better as a percent of reported income.

Funds continued to point to PIK income as largely intentional. Ares Capital Corp said that 90% of its portfolio was structurally originated as PIK. However, the company said that amid the scrutiny around PIK – while the market should not think it’s going away – “it’s probably just not going to be as prevalent as it once was.” Similarly, speaking to the structural nature of PIK, Logan Nicholson, president-diversified lending at Blue Owl Capital, said “the vast majority of our PIK investing was done intentionally, and for reasons that generated good returns.”

Cash flow improved marginally across BDCs, with the number of funds reporting cash flow from existing portfolio investments exceeding dividends falling to less than 50% of funds. The improvement was largely due to a reduction in dividend yields. In the first quarter, a number of publicly traded BDCs announced dividend cuts including Blue Owl Capital., Sixth Street Specialty Lending, Crescent Capital BDC, BCP Investment Corp., Golub Capital BDC, Barings BDC and Horizon Technology Finance. Many of those cuts took effect in the second quarter. Dividend yields across all BDCs improved modestly to 7.2% in the second quarter from 7.3% in the first quarter.

Publicly traded BDCs pay a significantly higher dividend yield than private and nontraded BDCs. Funds targeting the lower middle market segment also pay a higher dividend on average. Additionally, funds with lower software exposure report higher dividends on average.