Private credit has grown into an enormous industry. In 2020, the private credit market totaled around $2 trillion. It grew roughly 50% by early 2025. Some experts predict the private credit market will reach close to $5 trillion by 2029.
That projection, though, assumes that the bottom won't fall out of the private credit market.
DoubleLine Capital CEO Jeffery Gundlach, known as "the Bond King," publicly warned in November 2025 that some companies providing private credit as making "garbage loans." Goldman Sachs (GS 4.42%) CEO Jamie Dimon expressed concerns a month earlier that direct lending standards had become too lenient and stated, "If we ever have a downturn, you're going to see quite a bit more credit issues."
Wall Street appears to be sounding a warning about a possible private credit collapse. Should investors be worried about the ultra-high-yield business development company (BDC) stocks that have profited from the rise of private credit?
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Showing cracks
Some BDCs are already showing potential cracks. Prospect Capital (PSEC +0.19%) is one example
At first glance, Prospect Capital could look appealing. This BDC has a long history, with the same senior leadership team in place for 26 years. The stock trades at a steep discount to its net asset value (NAV). Prospect Capital also offers a forward dividend yield of 19.7%.
NASDAQ: PSEC
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However, investors should be leery of chasing that lofty yield. Prospect Capital's NAV has eroded significantly. The BDC also relies heavily on issuing perpetual preferred stock to raise capital, thereby increasing its fixed-payment obligations and potentially making its common stock dividends less dependable.
Financial giant FS KKR Capital (FSK 0.81%), with a forward dividend yield of 20.3%, is also showing some problematic signs. The BDC's non-accruals (loans where the borrower has missed payments) stood at 5% of its total investment portfolio at amortized cost at the end of the third quarter of 2025. In August 2025, Fitch lowered its outlook on FS KKR Capital to negative, citing its "persistently elevated non-accruals."
NYSE: FSK
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Not every BDC is made alike
However, investors shouldn't assume that every BDC could be in trouble if Wall Street's warning proves prescient. I think Ares Capital (ARCC 1.08%) is an excellent example of a direct lender that should be able to successfully weather any storm.
One reason why Ares Capital stands above the pack is the quality of its portfolio. Around 61% of the BDC's portfolio is in first-lien secured loans. These types of loans put Ares Capital at the front of the line for payment if a borrower encounters financial difficulties.
NASDAQ: ARCC
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Ares Capital's portfolio is also highly diversified, spanning 587 companies across 35 industries. Its most significant investment outside the company's Ivy Hill Asset Management subsidiary accounts for only about 2% of the overall portfolio. Ares' top 10 investments comprise 11.5% of its portfolio at fair value, well below the 25.2% average for its BDC peers.
The company's loss rates are also consistently lower than industry averages. Its non-accruals at cost are only 1.8%, below Ares Capital's historical average of 2.8% since the 2008 financial crisis.
Given these factors, I believe Ares Capital's 9.5% yield is secure. It also helps that the BDC has enough taxable spillover income to fund its dividends for more than two quarters if needed.
Caution is warranted, but opportunities remain
Not everyone on Wall Street thinks that the private credit market is headed for a meltdown. Morgan Stanley (MS 4.46%), for example, stated in its Private Credit 2026 Outlook published in December 2025, "Barring any unforeseen macro shock or recession event, the combination of declining interest expense and rising EBITDA levels should support improving fundamentals among private credit issuers."
However, caution is warranted. In particular, investors should research a BDC stock thoroughly before buying. That said, opportunities remain to profit from private credit and enjoy a solid income. I view Ares Capital as a textbook example of such an opportunity.
