Investors Are Still Piling Into Private Credit as Returns Fade

Despite a declining return outlook, net new money continued to pour into unlisted public business development companies in the third quarter.

Unlisted public BDCs have been the most popular semiliquid fund vehicle for individual investors to access private markets since 2024. While there are both listed and unlisted varieties of BDCs, this article focuses on the unlisted version available to the public, such as Blackstone Private Credit Fund, or BCRED.

Another Big Quarter of Flows

Investors added more than $10 billion of net inflows to unlisted public BDCs in the third quarter, bringing overall net assets to more than $123 billion, a 33% increase from the end of 2024. For the year to date through Sept. 30, unlisted public BDCs have had approximately $30 billion of net inflows.

Blackstone’s BCRED continues to attract billions of capital. The almost $47 billion fund is more than double the size of the next biggest unlisted public BDC and took in the most new money in the third quarter and the year to date through September.

Blue Owl Credit Income Corp remained second and took in nearly $2 billion in the third quarter, while one of its sibling unlisted BDCs, Blue Owl Capital Corporation II, was in net redemptions. Blue Owl caused a stir in November when it proposed merging Blue Owl Capital Corporation II into its listed BDC Blue Owl Capital Corporation OBDC before reversing course two weeks later.

Returns Are Trending Lower

The wave of inflows continues, even as the outlook for BDC performance appears weaker than in recent years. The exhibit below shows the median returns of unlisted public BDCs for the first three quarters of 2025, 2024, and 2023, compared with broad public market benchmarks including leveraged loans (the closest public comparison for private credit), US high-yield bonds, and US core bonds.

For the first three quarters of 2025, the median unlisted public BDC returned 6.2%, trailing the Morningstar US High Yield Bond Index at 7.2% and roughly matching the Morningstar US Core Bond Index at 6.1%. BDCs outperformed the Morningstar LTSA Leveraged Loans Index, which returned 4.6%, but it’s important to remember that BDCs employ fund-level leverage to boost returns, while the other benchmarks are unleveraged.

While nine months is a short time frame, the data offers a useful reality check for investors: Private markets are not immune to market cycles. Like any other asset class, they benefit from favorable conditions and can face headwinds when conditions turn, which they have recently.

The recent headwinds stem from the nature of the loans BDCs originate and the growing popularity of the asset class. Because income from these loans accounts for most of investors’ total returns, any change in yields matters. Most BDC loans pay a floating rate coupon, which consists of a base rate (typically the Secured Overnight Financing Rate) plus a credit risk spread. Both components have drifted lower in recent months, helping explain the lower returns this year. The same factors sparked a selloff in publicly traded BDCs in the third quarter. On top of that, BDCs typically collect incentive fees of around 12.5% on income above a still-easy-to-clear hurdle rate, which further reduces the returns that actually reach investors.

Float On

The base rate for most floating-rate bonds is the three-month average SOFR, which is closely influenced by the Federal Reserve’s target federal-funds rate. BDCs’ loans saw a significant boost during the Fed’s aggressive hiking cycle in 2022, as three-month SOFR climbed to a peak of 5.34% in December 2023 and remained near that level until September 2024. At the same time, the aggressive interest rate hikes wreaked havoc on fixed-rate bonds, like those in the Morningstar US Core Bond Index. Since then, the Fed has lowered rates by 1.5 percentage points, bringing its target range to 3.75%–4.00% and pulling SOFR down with it. September’s 30-day average was 4.22%, a figure that does not yet reflect the additional 0.25-point cut announced at the end of October. This can make it easier for borrowers to pay interest on their loans, but it also means investors will earn a lower return, all else equal. To be fair, this phenomenon also exists for leveraged loans and much of the securitized debt world.

According to CME FedWatch, there’s an 80% chance of an additional 75 basis points of rate cuts by the end of 2026, suggesting continued pressure on BDC income. This could tempt managers to pursue riskier, higher-spread loans to offset the base-rate shortfall. However, PitchBook LCD’s analysis of BDC credit spreads shows that, on average, the opposite has been happening.

Private Credit Spreads Are Getting Narrower

The next exhibit shows the allocation of spreads over the base rate for more than 100 listed and unlisted BDCs tracked by PitchBook LCD. The chart highlights a noticeable shift toward lower-spread credits between the third quarter of 2024 and the second quarter of 2025. This pattern is typical in a rapidly growing asset class: As more money flows into private credit, competition to put that money to work increases and puts downward pressure on borrowing rates for companies. At the same time, managers may be looking for higher-quality deals that have lower default risk as uncertainty over the US economy lingers.

As third-quarter net flows into unlisted public BDCs demonstrate, demand from investors for private credit shows no signs of slowing, suggesting this trend could also continue to put pressure on returns.

Managers Are Getting More Conservative

Amid this backdrop, and growing concerns over bankruptcies like First Brands, managers are getting more defensive. In September, for example, BCRED announced it was reducing its distributions from $0.22 a share to $0.20 a share starting in October, while noting it “aims to manage risk prudently.” And on Apollo’s third-quarter earnings call, CEO Marc Rowan also aimed to manage investors’ return expectations. He told investors the private credit was more attractive in previous years and that the firm is focused on reducing risk for clients.

Investors, Don’t Panic

Although signs point to continued downward pressure on income for unlisted public BDCs in the short term, there’s no need to panic. Instead, investors can use this as an opportunity to set realistic expectations for the asset class. Like any other market, private credit goes through cycles, and understanding those cycles can help investors make more informed, disciplined decisions.