By Patturaja Murugaboopathy
April 22 (Reuters) – Shares of private credit funds are trading at their deepest discounts to net asset values in more than 5-1/2 years as investors grow more sceptical of valuations and mounting stress in the sector.
According to LSEG data, the median price-to-forward 12-month net asset value ratio for such business development companies (BDCs) stood at about 0.74 at the end of March, implying a discount of roughly 26%, the widest since October 2020.
BDCs are publicly traded lenders to private companies and a key part of the private credit market. They offer investors higher yields, but with greater credit and liquidity risk.
Investor concerns centre on whether reported net asset values fully reflect strains in parts of the private credit market. Unlike publicly traded assets, BDC portfolios are valued using fair-value estimates and internal models that can lag shifts in credit conditions, fuelling scepticism that NAVs may overstate the true value of underlying holdings.
Concerns have also grown over exposure to software-heavy sectors and potential disruption from artificial intelligence, prompting closer scrutiny of valuation practices.
“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.
Redemption pressures have added to the strain. Some non-traded BDCs have faced heavy exit requests. Barings Private Credit Corp., for example, said its first-quarter tender offer was oversubscribed, with requests to redeem 11.3% of shares, though only 5% was accepted.
Analysts say this highlights the liquidity constraints in private credit funds, where investors who exit early may do so at higher NAVs, potentially leaving remaining shareholders exposed to markdowns.
BDCs had rallied in recent years as low interest rates drove demand for yield, but the recent strains have dented investor confidence.
(Reporting by Patturaja Murugaboopathy. Editing by Vidya Ranganathan and Mark Potter)
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