Shares of business development companies have tumbled more than 11.5% this year, with BlackRock TCP Capital Corp. hitting a record low and Carlyle Secured Lending Inc. falling to pandemic-era levels. The decline reflects mounting concerns about the sector's exposure to software companies and the potential for AI to disrupt traditional lending models. Listed BDC shares are trading at just 77% of their net asset value, well below the long-term average of 93%.

Analysts warn that the current market conditions are stacking up against BDCs, with falling income, slashed dividends, and loan markdowns creating a perfect storm. Paul Johnson of KBW Research notes that while deterioration in actual results hasn't fully materialized yet, it's likely on the horizon. The average risk premium on BDC notes has widened by 45 basis points this year, while high-grade US corporate bond spreads have barely budged.

Investors are particularly worried about BDCs' exposure to software companies, which account for about a quarter of their portfolios on average. The rise of AI threatens to make loans to these companies more difficult to refinance and could lead to lower recoveries on soured loans. Some funds have already marked down loans to companies like Medallia Inc., signaling potential trouble ahead. With the market spooked and investors rushing for the exits, the pain for BDCs may be just beginning.