11 large business development corporations (BDCs) now trade at significant discounts to their net asset values (NAVs), signaling investor doubts about underlying asset quality in private credit markets. This trend follows a broader retreat from private credit funds, driven partly by concerns over AI risks to software loans and liquidity constraints that forced some investors to exit. Hedge fund Glendon Capital Management argues the higher yields private credit funds offer compared to syndicated loans and high-yield bonds imply borrowers are of lower quality.

The stock market seems to agree, valuing BDCs like Glendon Capital Management suggests their loans should carry higher losses than reported. The core question is whether the industry's structure incentivizes managers to overstate asset values, a practice unsustainable as funds must eventually pay dividends or meet redemptions. The market's current judgment is clear: private credit's special sauce may not be as special as believed.