Investors in private credit funds are discovering that getting their money out can be far more expensive than the stated value of their holdings suggests. According to Reuters, recent tender offers for shares in non-traded business development companies (BDCs) have priced those shares 15% to 30% below the funds' net asset values (NAVs) as of the end of May.
The development highlights a growing tension in the private credit market: while these funds often report stable valuations, the actual price investors receive when they need to sell can be significantly lower. For everyday investors, this serves as a reminder that liquidity—the ability to convert an investment into cash quickly—comes at a premium, especially in less liquid asset classes like private credit.
What Are Non-Traded BDCs?
Business development companies are investment vehicles that lend to or invest in small and mid-sized private companies. Unlike publicly traded BDCs, which trade on stock exchanges and offer daily liquidity, non-traded BDCs are not listed on exchanges. Instead, they typically allow investors to redeem shares only at certain intervals, often with caps on how much can be redeemed each quarter.
This structure has made non-traded BDCs popular among income-seeking investors, as they often offer higher yields than traditional bonds. But the trade-off is limited liquidity. When redemption requests exceed the fund's capacity—usually capped at 5% of NAV per quarter—investors may have to wait or turn to the secondary market, where buyers like Cox Capital Partners step in to purchase shares at a discount.
The Numbers Behind the Discounts
Cox Capital Partners, a secondary-market buyer, launched about $31 million of tender offers for shares in non-traded BDCs managed by Apollo Global Management, Ares Capital, and BlackRock's HPS Investment Partners. The pricing was stark: Apollo holders were offered roughly 70 cents on the dollar, HPS about 75 cents, and Ares around 85 cents, all compared to the funds' May-end NAVs.
These discounts are becoming more visible as redemption pressure builds. Fitch Ratings reported that redemption requests increased at 10 of the 16 non-traded BDCs it tracks in the second quarter, averaging 10.3% of shares outstanding. Because these funds typically cap quarterly repurchases at 5% of NAV, many investors get only a portion of their requested amount, pushing those who want to exit faster toward the secondary market.
Once an external exit price consistently prints below stated values, it becomes harder for boards, auditors, and distributors to defend smooth valuations—even if the underlying loans haven't changed much. This dynamic can create a feedback loop where secondary pricing becomes the de facto benchmark for what these portfolios are really worth.
What It Means for Investors
For investors holding non-traded BDCs, the immediate takeaway is that the cost of exiting can be substantial. The discounts seen in these tender offers—ranging from 15% to 30%—are not just a one-off event. They can become a reference point for how platforms, advisors, and allocators think about the true value of these portfolios in a hurry.
If discounts persist, managers may feel pressure to mark portfolios more conservatively, which could slow reported NAV growth and make new fundraising tougher for groups like Apollo, Ares Capital, and BlackRock's HPS. The big shift is both psychological and practical: once investors start treating secondary pricing as the real exit value, the perceived cost of liquidity rises for the entire non-traded BDC wrapper.
For the broader market, this story ties into ongoing concerns about valuation transparency in private credit. As oil's rebound puts ECB rate hikes back on the table, higher interest rates can pressure the borrowers that BDCs lend to, potentially increasing defaults and further widening the gap between NAV and exit prices.
What to Watch Next
Investors should keep an eye on redemption trends and secondary market pricing for non-traded BDCs. If discounts widen or persist, it could signal broader stress in private credit markets. Regulators and industry groups may also scrutinize how these funds value their assets, especially as more investors seek to exit.
For those considering investing in non-traded BDCs, the key lesson is to understand the liquidity terms upfront. The ability to exit at or near NAV is not guaranteed, and the secondary market can impose significant haircuts. As the saying goes, liquidity is a luxury—and in private credit, it can be an expensive one.
