Major financial institutions across the United States have begun increasing loan costs for private credit funds amid mounting concerns over how these firms value their investments, according to three industry insiders. This shift could significantly impact the profitability of these investment vehicles.
Since late 2023, banks have demanded higher interest rates on crucial funding sources for these investment firms, including business development companies, as questions intensify regarding lending practices and the outlook for software companies in their portfolios, two sources revealed.
For credit facilities provided to specialized vehicles created by business development companies to hold loan portfolios, interest rates have climbed to as high as 2 percentage points above the Secured Overnight Financing Rate benchmark, up from approximately 1.8 percentage points last November, one insider disclosed.
A separate source indicated these rates jumped from 1.75 percentage points in November to between 1.85 and 1.90 percentage points currently. This financing method, known as back leverage, allows private credit managers to borrow against their existing loan portfolios as collateral and is commonly used to provide credit lines to these funds.
This represents a complete turnaround from the period before November when borrowing costs were generally declining, sources noted.
The tightening credit conditions could hamper funds’ ability to make new investments and manage daily operations.
“Any interest cost directly affects a private credit fund’s net interest income and IRR,” explained Sean Dunlop, a Morningstar banking analyst. IRR refers to internal rate of return, which measures expected annual profit rates from investments.
“It’s definitely a rough spell for private credit in general, between elevated redemption requests for semi-liquid funds like BDCs, (and) concerns regarding the creditworthiness of the underlying portfolio,” Dunlop noted.
These developments represent the latest warning signs for the private credit sector, a massive $2 trillion investment category that has faced increased scrutiny recently due to its vulnerability to artificial intelligence’s potential impact on software companies. Some investors have withdrawn from these vehicles while publicly-traded fund stock prices have plummeted.
JPMorgan Chase reduced the assessed value of collateral backing some loans to private credit players, a source told Reuters in early March. The bank provides funding to these firms through back leverage financing arrangements.
“People have questions about valuations now that they didn’t necessarily have six months ago,” said Seth Kleinman, who leads the special situations practice at Benesch law firm. “Those underlying questions about valuations are really stressing the banks in terms of how much they’re willing to lend.”
One source told Reuters that borrowing expenses have increased market-wide, with private credit companies also raising their rates, helping them offset higher funding costs. Since these funds rely on leverage to expand their investment capacity, more expensive borrowing reduces their profit margins.
The rate increases followed widespread credit concerns that escalated after bankruptcies involving a sub-prime lender and an auto parts company, plus a Blue Owl proposal to merge two funds in a manner that could have resulted in shareholder losses.
Before these events, borrowing costs through these facilities had been decreasing for approximately eighteen months, according to one source.
Rate adjustments that funds negotiate with banks for these loans are eventually revealed in regulatory documents. These rates vary among different funds and management companies.
Business development companies, which raise equity capital and combine it with borrowed funds to lend to medium-sized businesses, managed approximately $513 billion in assets by late 2025, according to Houlihan Lokey data. A recent Moody’s analysis revealed that U.S. banks had provided nearly $300 billion in loans to private credit firms as of June 2025. Banks also extended another $285 billion to private equity funds while maintaining $340 billion in unused lending commitments for these borrowers, based on Federal Reserve data and Moody’s research.
“The era of low rates for a sustained period of time seems like it is over,” Kleinman concluded.
