Moody’s Ratings downgraded its assessment of U.S. business development companies this Tuesday, shifting from a stable to negative outlook due to increased investor withdrawal demands, elevated debt levels, and diminished access to capital markets.
The rating agency noted a dramatic change in financial conditions for perpetual non-traded BDCs, which experienced robust capital inflows during the third quarter of 2025 but then faced unprecedented outflows during the first quarter of 2026.
These perpetual non-traded BDCs operate as closed-end investment funds that provide financing to private businesses. Unlike publicly traded companies, they don’t appear on stock exchanges and have no set expiration date, enabling them to raise money continuously while providing investors with restricted, occasional opportunities to withdraw funds.
Artificial intelligence technology has created another layer of risk, especially for BDCs that have significant investments in software companies.
This worry is intensifying challenges within private credit markets, which have already been a consistent source of difficulty for alternative investment managers, as investors fear AI could fundamentally threaten software investment portfolios – a major focus area for the $2 trillion sector.
While industry leaders have consistently characterized these worries as excessive, investors continue to feel anxious. Large funds have seen withdrawal requests spike as concerns mount that investment quality may decline as artificial intelligence technology advances.
BDCs, which provide loans to many of the same mid-sized companies that private credit funds target, serve as an early warning system for problems within the industry.
