August 26, 2026 – Private credit entered the second quarter under a cloud of negative sentiment. Loan marks have been under pressure, several high-profile 2021-vintage LBOs have struggled, and listed BDCs continue to trade at steep discounts to NAV.
In the second quarter, nearly every Business Development Company (BDC) marked its loan book slightly lower. Some market participants read this dynamic as confirmation that the credit cycle is turning against private credit. But beneath the headline weakness, the underlying setup improved.
Drilling down, the losses were concentrated and mostly unrealized (mark-to-market and spread-driven) rather than systemic, with a handful of names accounting for the overwhelming majority of the decline. Moreover, what was written down was primarily 2021-vintage loans (such as prominent private equity-backed software companies Medallia and Pluralsight), which were fundamentally too levered and reliant on too many add-backs, having been underwritten under the tightest terms of the past decade.
The average listed private credit fund in our coverage universe experienced a NAV decline of -1.4% in the second quarter. The credit costs were real but were mostly dispersed in problematic loans that the market has known about for the past several quarters.
In contrast, the cohort also had an average quarterly distribution of 2.4%, leading to a positive second quarter total return of 1.0%. On a market price basis, the average market total return (taking into account BDC market price performance) for Q2 was 1.4%.
Source: Accelerate
That was the perspective from the rearview mirror.
Looking ahead, what private credit loan books are expected to earn going forward was also revealed in the second quarter, and it moved the other way. Nearly every private credit manager quantified new-issue pricing reporting wider spreads (by approximately 50 bps). More importantly, they also noted better terms through lower leverage and tighter documentation (more covenants), as redemptions in the non-traded BDC channel pulled private credit’s marginal price-setter out of the market. BDCs described a shift from a borrower-friendly environment to a lender-friendly one.
Base rates have gone from a headwind to a tailwind for private credit investors. Coming into 2026, the market consensus was for two rate cuts from the Fed. Now, given the Iran war and persistent inflation, the outlook for base rates has flipped, and the market is now pricing in one or two rate hikes. Given that private credit is predominantly floating rate, a 25 to 50 bps increase in base rates would bolster distributions and yields, potentially improving market sentiment and reversing NAV discounts.
Source: CME Group
Higher base rates, wider spreads, greater upfront fees, lower leverage, tighter documentation, reduced origination competition — the forward economics of new lending turned favourable for the first time in years.
The bill for the last cycle was paid in NAV. Now, the earnings power for the next cycle is being written at higher, more attractive yields.
Moreover, the evidence that current loan marks are more technical in nature rather than fundamental is clear. Loans carried in the low 90s were repaid at or above par at maturity during the second quarter, with portfolio rotation clearing at cost or better, representing an orderly turnover that independently validates loan marks in which the market is overly discounting.
Borrower fundamentals remain strong, with single-digit EBITDA growth on average. BDC managers remain vigilant regarding AI exposure with respect to their software names, and thus far there has been no material adverse effect on software loans from AI. That said, the “AI killing SaaS” thesis in credit has morphed into a future refinanceability question, which will take years to ultimately be resolved. However, there are some 2021-era software loans on the watchlist, including Cornerstone OnDemand and Symplr (both Clearlake Capital-owned companies), that have been marked down to the 63-65 range but still have not been placed on non-accrual (in addition, both have PIK preferreds behind their first and second lien loans). Nonetheless, the risk premium for software credit has gone up markedly.
Non-accruals were stable during the quarter, remaining flat at 1.9% of fair value quarter-over-quarter, and up 20 bps year-over year. Also, payment-in-kind (PIK) as a percentage of total income declined slightly to 8.1% from 8.5% last quarter. That said, while stable or declining non-accruals and PIK appear positive on the surface, one must investigate what is driving the changes. If PIK names are paid off and non-accruals are cured, then lenders are happy. If PIK names and loans on non-accrual are written down and replaced by new issues, then NAV suffers. There were some puts and takes when it comes to the second quarter, and there were several idiosyncratic names on non-accrual with justified write-downs or realized losses.
Source: Accelerate
Underwriting discipline was notable during the quarter, as many managers focused on repurchasing BDC shares at a discount rather than underwriting new loans. In our coverage universe, the average BDC repurchased 2.6% of its shares over the past year. Buying back shares at a discount to NAV is accretive to NAV per share, particularly at the current average -22.6% discount to NAV at which BDCs are trading.
In addition to the sizeable NAV discounts, which provide capital appreciation for investors should sentiment improve and BDCs trade to their underlying loan portfolio values, books are currently marked well below cost. On average, BDCs in our coverage universe are marked at 95.9% of cost, providing an additional capital appreciation opportunity if loans are paid off at par.
One of the most interesting dynamics is the apparent disconnect between the improving fundamental outlook for BDC loan books and the negative sentiment that is pervasive in the asset class. This negative sentiment is showcased by the broad-based, double-digit NAV discounts at which listed BDCs are trading. In its Q2 conference call, Blue Owl discussed this phenomenon, noting that the market’s pricing of its BDC implies a scenario in which 40% of the loan portfolio defaults and recoveries are just 50 cents on the dollar.
Source: Blue Owl Technology Finance Q2 conference call, Bloomberg
For reference, from 2008 to 2010, the cumulative realized losses in private credit were 10.2%. Today’s BDC pricing implies a scenario far worse than that of the Global Financial Crisis nearly 20 years ago. This dynamic exists despite much of the past several quarters’ headline risk seemingly subsiding.
In summary, Q2 was a book value quarter, not an earnings power quarter, and given widespread double-digit NAV discounts, the market is extrapolating the wrong one. Loan marks are backward-looking and largely non-cash, while spread, fees, and base rates are forward-looking. The second quarter delivered negative news on the former and positive news on the latter. It was the quarter in which the 2021-vintage loans stopped being deferred and started being retired, while the 2026-vintage was underwritten at the best terms since 2023. Those two dynamics occurred simultaneously, but the market is only pricing in the first scenario.
The Accelerate Liquid Private Credit Monitor is utilized in running the Accelerate Diversified Credit Income Fund (TSX:INCM, INCM.B, INCM.U), which may have positions in some of the securities mentioned.
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