Key Takeaways
- • US private credit portfolios held by 44 business development companies (BDCs) declined to a fair-value-to-cost ratio of 97.57% in Q2 2026, down from 99.25% at end-2025, representing a deterioration significantly greater than typical six-month periods.
- • Software sector loans faced disproportionate pressure, with 81% of BDC software loans marked down during 2026 compared to 40% of non-software loans, highlighting AI disruption concerns and sector-specific performance challenges.
- • The combined fair value of BDC portfolios fell to $92.88 billion at end-June 2026 versus amortised cost of $95.19 billion, reflecting ongoing valuation pressure despite some stabilisation signals in Q2.
- • Non-performing loans escalated materially, with approximately 4% of borrowers holding loans valued below 80% of par—up from roughly 1% annually during 2023-2025—signalling increased credit stress across private credit markets.
- • Wider market spreads, weaker borrower performance, and artificial intelligence-driven industry disruption continue to compress returns and challenge valuations in the private credit sector.
Summary
US private credit markets are experiencing persistent valuation pressures through mid-2026, despite modest stabilisation signals in the second quarter. A Reuters analysis of regulatory filings from 44 business development companies—the primary vehicles for private credit exposure to small and mid-sized businesses—reveals that portfolios remain underwater on a fair-value-to-cost basis. The 44 BDCs held combined investments with fair value of $92.88 billion at June 30, 2026, compared with reported amortised cost of $95.19 billion. This 97.57% fair-value-to-cost ratio represents meaningful deterioration from the 99.25% ratio at year-end 2025, with Chris Cessna, managing director at Houlihan Lokey's Portfolio Valuation and Fund Advisory Services, characterising the six-month decline as significantly steeper than normal seasonal patterns.
The software sector has emerged as a critical vulnerability within private credit portfolios. BDCs marked down 81% of their software loans during 2026, substantially exceeding the 40% markdown rate for non-software loans. This divergence reflects compounding headwinds specific to enterprise software: weaker borrower performance, margin compression from competitive pressures, and heightened concerns about artificial intelligence disruption to traditional software business models. The concentration of markdowns in this sector signals that private credit underwriting assumptions around software company resilience and valuation multiples require recalibration.
Credit quality metrics have deteriorated materially across the portfolio. Approximately 4% of borrowers now hold loans valued below 80% of par—a sharp uptick from the approximate 1% annual rate observed during 2023-2025. While the broadest valuation declines occurred in the first quarter, losses in Q2 became more concentrated among individual borrowers, suggesting sector-specific stress rather than systemic market-wide dislocation. The combination of wider market spreads, weaker underlying borrower fundamentals, and evolving artificial intelligence-driven industry risks continues to compress expected returns and force private credit lenders to reassess portfolio valuations. For institutional investors and fund managers, these trends underscore the need for heightened due diligence on software exposures and closer monitoring of Q3 and Q4 2026 performance data.
The software sector has emerged as a critical vulnerability within private credit portfolios. BDCs marked down 81% of their software loans during 2026, substantially exceeding the 40% markdown rate for non-software loans. This divergence reflects compounding headwinds specific to enterprise software: weaker borrower performance, margin compression from competitive pressures, and heightened concerns about artificial intelligence disruption to traditional software business models. The concentration of markdowns in this sector signals that private credit underwriting assumptions around software company resilience and valuation multiples require recalibration.
Credit quality metrics have deteriorated materially across the portfolio. Approximately 4% of borrowers now hold loans valued below 80% of par—a sharp uptick from the approximate 1% annual rate observed during 2023-2025. While the broadest valuation declines occurred in the first quarter, losses in Q2 became more concentrated among individual borrowers, suggesting sector-specific stress rather than systemic market-wide dislocation. The combination of wider market spreads, weaker underlying borrower fundamentals, and evolving artificial intelligence-driven industry risks continues to compress expected returns and force private credit lenders to reassess portfolio valuations. For institutional investors and fund managers, these trends underscore the need for heightened due diligence on software exposures and closer monitoring of Q3 and Q4 2026 performance data.
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