BDC vs. Private Credit Funds: Key Differences for Investors

BDC vs. Private Credit Funds: Key Differences for Investors

Alternative investments aimed at portfolio diversification and enhanced returns have gained significant traction among investors in today’s dynamic financial landscape. Among the various alternative investment vehicles reshaping the private lending landscape, Business Development Companies (BDCs) and private credit funds stand out as two of the most prominent. BDCs are closed-end investment companies organized under the Investment Company Act of 1940 to supply capital to businesses in the United States, particularly smaller and mid-sized ones. They are typically publicly listed, allowing investors greater access to private credit markets while maintaining liquidity and regulatory transparency associated with public markets. Private credit funds, however, are vehicles typically offered privately that lend directly to companies outside traditional banking channels. These funds primarily cater to institutional and accredited investors seeking specialized lending opportunities, operating with limited public disclosure.
Following the implementation of post-2008 financial crisis banking regulations, a significant gap emerged in corporate lending—one that was rapidly filled by BDCs and private credit funds. By 2023, private credit assets had grown to more than $2.1 trillion globally, with BDCs having established a distinct footprint in funding innovative middle-market borrowers.⁽¹⁾

Overview of BDCs and Private Credit Funds
In the expanding universe of private lending, BDCs and private credit funds have become essential instruments enabling businesses to access much-needed capital. While institutions supply funds to companies otherwise denied financing have one thing in common, their structures, means of entry for investors, and regulatory frameworks diverge quite considerably.
BDCs are SEC-registered closed-end investment companies established under the Investment Company Act of 1940. They focus their investments on small and mid-sized U.S. companies that frequently lack access to conventional financial services. Most BDCs are listed on major stock exchanges, providing retail investors with rare access to private credit markets, along with the benefits of liquidity, transparency, and consistent dividend income.⁽²⁾
On the other hand, private credit funds are typically private vehicles-set up, for example, as limited partnerships - that make loans directly to companies. Private credit funds often employ customized financing strategies that may include senior secured loans, mezzanine debt, or distressed credit opportunities. Because of their private nature, they aren't subject to the disclosure requirements of BDCs and are able to operate in areas of private placement exemptions like Regulation D, meaning they are primarily for institutional investors and accredited individuals.⁽³⁾
The key distinction lies in investor access: BDCs democratize private credit by allowing retail participation, while private credit funds cater to sophisticated investors seeking tailored exposure and potentially higher returns through direct lending.

Structural Differences: How BDCs and Private Credit Funds Are Built
Both BDCs and private credit funds provide alternative sources of financing outside the traditional banking system. However, their structural frameworks differ significantly, influencing their risk exposure, leverage capacity, and operational flexibility.
Under the Investment Company Act of 1940, BDCs are structured as closed-end investment companies. Hence, they can be categorized into three different publicly-traded, non-traded, and private offerings: the former does fall under marketable stock, which would be traded in the stock market under articles like NASDAQ or NYSE, but would afford daily liquidity to retail investors, and the latter two have similar characteristics, a non-trustee, but continuous offerings and do not hold listing in the exchange. The last category comprises privately offered services, although one would have been accredited to access the offering. All BDCs must be registered with the SEC and adhere to specific reporting and leverage limits, typically maintaining a maximum debt-to-equity ratio of 2:1.⁽⁴⁾
Private credit funds, which generally rely on Regulation D exemptions, enjoy greater flexibility in portfolio construction and leverage use due to their private partnership structures. Most are structured for institutional or very high wealth investors, locking their money for a period and not giving them flexibility for redemption. Their portfolios often include senior secured loans, mezzanine financing, and distressed debt strategies, tailored to the specific needs of borrowers.⁽⁵⁾
Liquidity, investor access, and regulatory oversight are among the key structural distinctions between the two vehicles. While BDCs are rather transparent and accessible through the public market, private credit funds tend to be customized and controlled, often at a cost of liquidity and disclosure.

Regulatory Framework: Transparency vs. Flexibility
The defining aspect distinguishing Business Development Companies (BDCs) from private credit funds is the different regulatory coverage concerning investors' protections, disclosures, and operational flexibility.
BDCs operate under the Investment Company Act of 1940 and are subject to strict compliance and reporting requirements, ensuring a high degree of transparency and accountability. BDCs get publicly registered and are obliged to file periodic reports, details of which must contain disclosures by way of Form 10K, 10Q, and 8-K. Essentially, these disclosures report detailed portfolio holding reports alongside liabilities.⁽⁶⁾ BDC is also governed by board governance requirements, maintains leverage constraints of debt generally not more than a 2:1 equity ratio, and public disclosure requirements; all lending substantially to retail investors.
In contrast, private credit funds typically operate under Regulation D or similar state-level exemptions, allowing them to raise capital through private placements without registering with the SEC. In contrast to BDCs, such firms are not bound to filing periodic reports; rather, they tend to use private placement memorandums and investor agreements to inform investors of the terms and risks.⁽⁷⁾ Such regulatory light touch gives the manager enormous freedom when structuring transactions, customizing covenants, and leveraging, but does not afford equal transparency of those actions.
In essence, BDCs prioritize regulatory transparency and public accessibility, while private credit funds emphasize flexibility and customization, catering to sophisticated investors comfortable with more complex and less transparent structures.

Return Potential and Risk Profile
One important consideration for investors calibrating a portfolio of BDCs and private credit funds is the trade-off among yield, fees, risk, and diversification inputs to the return profile. According to the Cliffwater report, “Total returns have historically been driven by high single-digit or low double-digit interest income returns, averaging 10.79% over the lifetime of the CDLI, and with a historical range between 8% and 12%. Higher yields have been associated with economic distress and high reference rates, and lower yields associated with economic growth and low reference rates.” ⁽⁸⁾ However, BDC yields are subject to market volatility, as their publicly traded nature exposes them to broader equity market fluctuations. In addition, BDCs often carry management and incentive fees of up to 3% of gross assets, which can erode net returns during periods of market stress.
By contrast, private credit funds generally offer a more stable stream of income, usually earning yields of 10.7 percent. Focused on providing senior secured loans and bespoke finance, such funds are, generally speaking, less affected by the fluctuations of the public equity markets. Their fee structures are generally lower and performance-based, aligning the interests of managers and investors. They are subject to illiquid risk, whereby investors must remain locked in for several years; however, risks also include borrower concentration and changes in underwriting quality depending on the skills of the fund manager. ⁽⁹⁾
Consequently, BDCs provide diversified exposure across sectors and borrowers, while private credit funds offer more concentrated yet highly tailored investment strategies. After all, the decision would boil down to an investor's liquidity appetite, transparency, and risk-adjusted yield.

Conclusion
As private credit continues to reshape the investment landscape, understanding the distinctions between Business Development Companies (BDCs) and private credit funds becomes essential for informed decision-making. While both vehicles serve the common goal of financing businesses outside traditional banking systems, they differ significantly in structure, regulation, and investor experience.
BDCs, as SEC-regulated publicly traded investment companies, attract retail investors seeking income and liquidity through dividend yields. In contrast, private credit funds operate with lighter regulation, catering to institutional and high-net-worth investors seeking customized lending strategies that may offer more stable returns but lower liquidity and transparency.
Nonetheless, both BDCs and private credit funds feature as meaningful contributors to fixed-income portfolio diversification. This aspect becomes even more relevant today in light of their access to middle-market lending and alternative credit strategies, which tend to display poor correlation to more traditional bonds or equities.
Ultimately, the choice between BDCs and private credit funds depends on an investor’s objectives and risk tolerance. Investors prioritizing liquidity and regulatory oversight may prefer BDCs, while those seeking higher yields, customization, and long-term capital deployment may gravitate toward private credit funds. By aligning investment vehicles with personal goals, investors can strategically leverage both BDCs and private credit funds to build a resilient, income-generating portfolio.

Sources:

1.      Wealth Management.com, The Role and Economic Benefits of Private Credit and BDCs, May 27, 2025

2.      Investopedia, Understanding Business Development Companies (BDCs) and Investment Tips, August 8, 2025

3.      Generis Global Legal Services, Understanding Regulation D in Private Placements: A Comprehensive Guide, October 25, 2024

4.      Dechert, Demystifying the Three Main BDC Structures, July 29, 2024

5.      Unity Investments, Private Credit vs BDCs: A Direct Comparison, May 28

6.      Seward & kissel LLP, Operating Business Development Companies: A Brief Overview, April 23, 2025

7.      Harvard Law School Forum on Corporate Governance, SEC’s New Regulation D Rules and Private Fund Offerings, July 26, 2013

8.      Cliffwater, Cliffwater Direct Lending Index

9.      Cliffwater, Long Term Private Equity Performance 2000-2024, January 13, 2025