The Gilded Age of Private Credit

Edith Wharton's ‘The Age of Innocence’ is a story about appearances; it explores the tension between what is presented on the surface and what exists underneath. Just as Newland Archer navigates the expectations of Gilded Age New York whilst privately questioning them, private credit markets face a similar dilemma where headline figures suggest stability, but the true complexity of risk sits beyond immediate view.

Within private credit there is an expanding subsector known as business development companies (BDCs). These are investment vehicles that provide access to financing for small-to-medium sized companies that often struggle to access traditional forms of lending. Today, these BDCs make up $500bn of the both the public and private market and are responsible for approximately ¼ of all direct lending in the US, whilst consistently yielding high single-digit returns.

This success gained them attention, however, the headline numbers may not fully represent what is going on, particularly for non-traded BDCs, which sits at the centre of the risk debate.

Behind The Curtain

BDCs have historically operated near a 1x debt-to-equity leverage, meaning for every $1 of equity, the BDC has borrowed $1 of debt, creating $2 of investable assets. The point of contention here is whether this ratio actually reflects the total economic leverage embedded in the structure. In 2018, the Small Business Credit Availability Act reduced the minimum asset coverage requirement from 200% to 150%, effectively allowing BDCs to increase debt-to-equity from 1:1 to 2:1, but why does this matter so much? It exposed a new question: how should investors measure leverage when risk isn’t fully reflected in the balance sheet.

One answer lies in the increasing use of joint ventures (JVs), often structured with senior secured loan programs (SSLPs), to expand lending capacity. Since this leverage may not be fully reflected in the BDCs own balance sheet, it creates a gap between the regulatory leverage ratio reported and the consolidated leverage of the entire operation.

To put this simply: suppose you and your partner decide to buy a house together. You apply for the mortgage, but the bank only assesses your finances and ignores your partner’s debt obligations. The mortgage may look affordable, but the true financial risk is larger. This is the challenge faced here, where investors may see a figure not fully representing the risk they own.

This does not mean that BDCs or JVs are inherently problematic, or are using a loophole to mislead investors, these investment vehicles still serve an important role by expanding access to capital for businesses and allowing investors into private markets. The real issue lies in whether investors understand the leverage and risk they are carrying. Consider a publicly traded BDC, Blue Owl Capital Corp. (OBDC). It owns 68% interest in Blue Owl Credit, a JV that is not consolidated in its balance sheets. As of December 31st, 2025, Blue Owl Credit had $1.7bn of debt at 2.8x its equity, a higher ratio than OBDCs own reported leverage. The recent liquidity pressures on Blue Owl Capital further illustrate this broader challenge, which is when investor confidence weakens, questions emerge not only about the asset quality but about the liquidity and leverage of the structures holding these assets.

The End of Innocence?

Despite owning 68% interest of Blue Owl Credit, OBDC does not have to consolidate it. Under GAAP, owning more than half of a company means consolidating its balance sheet into yours, though BDCs are an exception. In legal terms they are investment companies and so under ASC 946, they are recorded at fair value (including joint ventures). The same exemption extends to its regulation whereby the leverage ratio is calculated off the BDCs books, so JV debt sits outside of that limit too.

This is where Wharton’s universe becomes relevant. Ellen Olenska, the outsider in ‘The Age of Innocence,’ observes society governed by appearances: "as if I were in a convent again - or on the stage, before a dreadfully polite audience that never applauds.” Her comment captures a world where everyone understands the performance but hesitate to question the script. Private credit markets have experienced a similar dynamic. Investors have sat in a similar audience, attracted by the performance of strong returns and low historical losses, watching closely, remaining composed and in many ways, “dreadfully polite.” Yet as the structures beneath the surface become more complex, a deeper question emerges: are markets evaluating the true fundamentals, or simply accepting the performance presented to them?

None of this is a loophole or intentionally concealed, it is simply GAAP-sanctioned practice disclosed in the footnotes. But disclosure does not mean visibility, the ratio a BDC advertises is the unconsolidated figure, and most investors never reconstruct the numbers themselves.

Every Gilded Age eventually faces the same question: what exists beneath the surface?

Applause.