Direct Lending Returns

I examine the performance of US business development companies (“BDC”). BDCs have produced returns in line with those of private funds engaged in direct lending. Leveraged loan and small-cap value equity returns explain a significant part of BDC performance, and the alpha of BDCs is zero on a market-value basis but a statistically significant 2.74% per annum based on net asset value (NAV) valuations. I find no evidence of an illiquidity premium, which suggests that the alpha could result from regulatory arbitrage or a peso problem. Cross-sectional BDC returns are widely dispersed and exhibit strong persistence in top- and bottom-quartile manager performance.