Redemption pressure in non-traded business development companies (BDCs) is showing little sign of easing, with liquidity constraints and widening valuation gaps forcing managers to rely on caps and prorated withdrawals.

Investor redemption requests continue to exceed available liquidity across parts of the non-traded BDC universe.

"The basic dynamic is familiar: Redemption requests are fulfilled when inflows are sufficient to meet outflows, but once that balance breaks, liquidity has to be rationed," a report written by PIMCO’s Lotfi Karoui stated.

Unlike the 2023 stress episode in real estate investment trusts (REITS), where valuations were supported by appraisals and income streams, BDC portfolios are anchored mostly in private corporate lending. That makes NAVs more sensitive to borrower performance. 

"If earnings weaken, interest coverage deteriorates, or the loan becomes nonaccrual, then the pressure can show up more quickly in income, marks and net asset values," the report stated.

Manager Confidence is Replacing Market Pricing

Karoui argues this is creating a widening "confidence gap" between managers. 

"NAVs increasingly reflect manager-specific marks rather than a shared clearing price, widening dispersion and rewarding sponsors with stronger asset quality. Valuations could eventually converge toward market-clearing levels through NAV markdowns, wider secondary discounts, or realized losses," the managing director wrote.

That dispersion, the report notes, is difficult to reconcile with low reported volatility in NAVs. The combination of smoother reported performance and wide cross-sectional differences suggests valuations are being driven more by manager-specific models than consistent pricing inputs. Over time, that dynamic may resolve through markdowns, wider secondary market discounts, or realized losses as.

Public Markets are Sending a Different Signal

Public BDC markets are telling a slightly different story. Equity valuations remain under pressure, but price-to-book ratios appear to have stabilized near a local trough, suggesting the worst of broad derating may be behind the sector. 

BDC bonds have outperformed equities in recent weeks, reflecting investor willingness to distinguish between valuation uncertainty from default and recovery risk.

"From here, further material widening would likely require a more acute shock – most plausibly a reassessment of balance sheet liquidity risk among non-traded BDCs. For now, that risk appears manageable given structural guardrails, including redemption limits and access to bank credit facilities," the report noted.

Fundamentals Remain Stable — but Not Improving

Karoui described the underlying portfolios of BDC’s as "not breaking, not healing. Sequentially, conditions look broadly stable."

Payment-in-kind (PIK) loan exposure was essentially unchanged in the first quarter of 2026, indicating "limited incremental stress for now." But year-over-year trends still point to gradual deterioration in borrower health.

The more important signal, Karoui noted, continues to come from the markets. 

"Dispersion remains elevated across lenders and is higher among non-traded BDCs despite the perception of smoother reported performance," he wrote.

PIMCO Sees Better Opportunities Beyond Direct Lending

The report noted investors should avoid viewing private credit as a single asset class, arguing that current stress is concentrated in direct lending rather than the broader market. 

The firm expects direct lending portfolios to remain under pressure but sees stronger opportunities in asset-based finance (ABF), high-quality consumer credit, and mortgage credit.

PIMCO said many ABF investments can offer investment-grade-like risk profiles, making them attractive for investors seeking diversification and more resilient risk-adjusted returns.

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