Private credit funds trade at 26% discount as valuation fears grow

Shares of private credit funds are trading at their deepest discounts to net asset values in more than five and a half years, with the median discount reaching 26% as investors grow more skeptical of opaque valuations and mounting stress in the sector.

"Publicly traded BDCs with material software exposure have seen share prices fall considerably below net asset value, which is constraining their financial flexibility and access to new equity capital," Moody's Ratings said in a note.

The median price-to-forward 12-month net asset value for business development companies (BDCs) stood at about 0.74 at the end of March, the widest discount since October 2020, according to LSEG data. This has been particularly evident in funds with heavy exposure to the software sector, which faces potential disruption from artificial intelligence.

The growing discounts raise questions about the reliability of NAVs reported by the funds, which use internal models that can lag in reflecting deteriorating credit conditions. This skepticism is forcing a moment of truth for fund managers, where share buybacks are becoming a crucial signal of their own conviction in their balance sheets.

Valuation Skepticism Mounts

Investor concerns center on whether the net asset values, which are determined by the funds themselves using fair-value estimates, accurately reflect the underlying health of their loan portfolios. Unlike publicly traded assets, these valuations can be slow to adjust to shifts in credit conditions, fueling suspicions that NAVs may be overstated. The pressure is intensified by redemption requests, with some non-traded BDCs like Barings Private Credit Corp. seeing tender offers significantly oversubscribed.

Buybacks as a Litmus Test

In response to the market's skepticism, some of the largest players are turning to share buybacks. Blue Owl Capital Corp. (OBDC), which trades at 78% of its year-end NAV, and Blackstone Secured Lending Fund (BXSL), trading at 90% of NAV, have both recently announced new repurchase authorizations of $300 million and $250 million, respectively. However, the lack of buyback activity from other funds, such as FS KKR Capital, which trades at just 53% of its NAV, is seen as a red flag by investors. The fund is even seeking shareholder approval to sell shares below NAV, a move that could be contentious.

This article is for informational purposes only and does not constitute investment advice.