Private Credit's $3 Trillion Puzzle: Decoding BDCs

Private credit has evolved from a niche asset class into a $2 trillion powerhouse over the last decade, with Business Development Companies (BDCs) playing a critical role in driving this growth. Yet, despite their promise, BDCs remain frustratingly opaque. Investors often rely on brand names, anecdotes, or headline yields rather than thoroughly examining performance—risky behavior in a market projected to reach $3 trillion by 2028.

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To assess BDCs properly, investors need a clear, data-driven approach to comparing credit quality, portfolio composition, valuation, and more. In our previous post, we built a comprehensive benchmarking database featuring the top 10 public BDCs.

In this post, we'll apply a structured, three-part framework to simulate making an investment recommendation for Oaktree Specialty Lending (OCSL) by comparing it directly against our established benchmark.

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Step 1: Start with Credit Quality

When it comes to evaluating a BDC, credit quality should always be top of mind. One of the clearest indicators of portfolio health is the non-accrual rate—the percentage of loans that are no longer generating interest income.

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For this example, we use OCSL as our sample investment target and screen its non-accrual rate against a relevant peer group and the group average. This gives us a baseline read on portfolio stress.

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But the headline number only tells part of the story. We also drill down into the details of troubled positions to see whether issues are idiosyncratic (one-offs) or systemic in nature. That nuance is essential for distinguishing between an isolated problem and a potential red flag about underwriting or strategy.

Step 2: Analyze Portfolio Composition

Non-accruals can be thought of as a byproduct of two key factors: portfolio construction and underwriting quality. So the next step is to benchmark portfolio composition of the target BDC against its peer group. We focus on three key dimensions:

1. First Lien Percentage – Tells us where the BDC prefers to sit in the capital structure, and how much subordination risk they’re taking on.
   
2. Industry Concentration – Highlights how diversified the portfolio is and which sectors the BDC is actively exposed to. Some BDCs concentrate in high-growth areas; others may lean heavily into cyclical or riskier sectors.
   
3. Average Position Size – Balances the tradeoff between concentration risk and borrower diversification. A highly concentrated portfolio might deliver higher returns—or higher volatility.
   

By analyzing these elements together with non-accrual metrics, we get a more complete risk picture. For instance, if two BDCs have different non-accrual rates but otherwise similar portfolios, it might suggest differences in underwriting discipline.

Step 3: Don’t Skip Valuation

Even if a BDC checks all the right boxes on credit and portfolio, it might not be a good investment—unless the price is right.

That’s why the final piece of our framework is valuation, with a focus on Price-to-NAV (Net Asset Value). This metric captures how much investors are willing to pay relative to the fair value of a BDC’s portfolio.

• If a BDC trades below NAV, it could reflect skepticism about portfolio quality—or signal an opportunity if those concerns are overblown.
  
• If a BDC trades above NAV, it shows strong investor confidence—but may come with unjustified premiums.
  

Final Investment Recommendation

To tie it all together, we run OCSL through our full evaluation matrix framework, screening for credit quality, portfolio composition, and valuation.

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Beyond the core metrics, we also use our AI platform to flag idiosyncratic contextual factors—in this case, recent strategic actions by OCSL’s management in response to market volatility. Our platform notes that these moves are being viewed positively by the market, reflecting a signal of confidence and sustained commitment.

Concluding Thoughts: A Smarter Way to Invest in BDCs

The three-part framework we just walked through—Credit Quality, Portfolio Composition, and Valuation—offers a practical way to assess any BDC, whether you're evaluating a new name or revisiting an existing holding. And while no framework is exhaustive, it gives investors a strong starting point for asking the right questions and uncovering hidden risks or opportunities.

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At Centauri AI, we believe in empowering investors with transparency, tools, and data-driven insight. If you found this analysis useful and have topics you’d like us to explore next, we’d love to hear from you!

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