The $3.5 trillion private credit industry, which stepped into the void left by traditional banks, is showing signs of systemic strain. An analysis of S&P Global Market Intelligence data reveals that collective profits for these business development companies (BDCs) swung to a negative $7.6 million in the first quarter of 2026, down from a $26 million profit a year prior. This downturn is largely driven by writedowns on loans to software firms and other businesses facing disruption from AI advancements.

Mounting Debt and Hidden Leverage

Beyond direct loan losses, the sector faces scrutiny over its reliance on complex borrowing structures. Interest expenses for these funds have climbed by 20% over the last two years, averaging roughly $28 million. Furthermore, many firms are increasingly using payment-in-kind (PIK) interest—where debt is added to the balance sheet in lieu of cash payments—which now accounts for 8.1% of interest income.

Off-balance-sheet borrowing has also surged. Among the 14 BDCs that provide full disclosure on their joint ventures, total debt grew by 80% throughout 2025, with an additional 14% increase in the first quarter of 2026. Major players like Blue Owl’s OTF fund reported record markdowns of $490 million, while FS KKR and Crescent Capital BDC similarly booked significant losses. While industry representatives maintain that BDC reporting remains more transparent than bank balance sheets, analysts warn that the current trend of widespread asset revaluation will inevitably result in lower returns for investors.