What is private credit?

Private credit refers to loans made directly to companies outside of public markets. Unlike publicly traded bonds, these loans are privately negotiated between lenders and borrowers. This market has grown tremendously, now exceeding $1 trillion, as companies seek more flexible financing options than what traditional banks might offer. Private credit typically involves lending to small and medium-sized businesses that may not have access to public markets.

What is a Business Development Company (BDC)?

A Business Development Company (BDC) is a type of investment company that invests primarily in the debt and equity of private companies. BDCs are required by law to pass at least 90% of their income to shareholders, which is why they often offer high dividend yields. They function somewhat like private equity for retail investors, providing access to private businesses that would otherwise be unavailable to most investors. Many BDCs focus on lending to middle-market companies, making them key players in the private credit space.

Why are traditional banks entering the private credit market?

Traditional banks are entering private credit for several reasons. First, it's a growing market with attractive returns compared to traditional lending. Second, regulatory changes since the 2008 financial crisis have restricted some types of bank lending, pushing banks to find new avenues for growth. Third, private credit allows banks to offer more customized financing solutions to clients. This shift represents a significant structural change in how corporate lending happens, creating both competition and partnership opportunities with established private credit players.

What is the difference between an ETF and an ETN in the context of BDC investments?

Both ETFs (Exchange-Traded Funds) and ETNs (Exchange-Traded Notes) provide exposure to BDCs, but with important differences. An ETF like BIZD or PBDC actually owns shares in multiple BDCs, making you a partial owner of those underlying companies. An ETN like BDCZ, however, is a debt security issued by a bank that promises returns linked to a BDC index, without actually owning the underlying companies. ETFs typically have lower credit risk since you own the actual assets, while ETNs carry the additional risk of the issuing bank's creditworthiness.

What does "dividend yield" mean for BDC investments?

Dividend yield represents the annual dividend payment as a percentage of the current stock price. For BDCs, this is particularly important because they're required to distribute at least 90% of their taxable income to shareholders. This often results in higher yields compared to traditional stocks. For example, a BDC trading at $10 per share that pays $1 in annual dividends would have a 10% dividend yield. When evaluating BDCs, dividend yield is a key metric, but it's also important to consider the sustainability of those dividends based on the company's loan portfolio quality and income generation.

15 handpicked stocks

Banks in Private Credit

This carefully selected group of stocks captures the trillion-dollar shift as traditional banks enter the private lending arena. Our professional analysts have identified key Business Development Companies (BDCs) and specialized funds that stand to benefit from this growing financial trend.

Han Tan | Market Analyst

Updated 2 days ago | Published at juillet 15