Rising Portfolio Overlap and Correlated Nonaccruals Create Systemic Risk in BDCs
A major structural vulnerability is building in the Business Development Company (BDC) sector as portfolio overlap — the share of loans in a fund's portfolio that also appear in other credit funds — has climbed to historic heights. While private credit stocks have rebounded strongly in July and August 2026, a Friday note (August 28, 2026) by Raymond James analyst Robert Dodd reveals that this overlap has expanded from just 10% of the average BDC portfolio in 2010 to over 55% today.
The primary driver of this trend is the industry's shift toward financing larger, sponsor-backed leveraged buyouts. Because these deals require massive debt packages, individual credit funds take smaller pieces of the same large loans to maintain diversification. While this co-investment model allows BDCs to participate in larger transactions, it has created a highly correlated risk profile across the industry, particularly as credit quality deteriorates.
The Rise of Correlated Nonaccruals
The most alarming finding is that as general loan overlap has risen, there has been an even sharper rise in the overlap of problem loans that are no longer making payments (non-accruals). This means that a default by a single large borrower can simultaneously damage the earnings and asset values of multiple prominent BDCs, undermining the diversification benefits that investors expect.
According to the Raymond James analysis:
- Morgan Stanley Direct Lending Fund (MSDL): Has the highest total overlap, sharing 85% of its borrowers with at least one other credit fund.
- Blue Owl Capital: Portfolio overlap stands at approximately 70%.
- Blackstone and Ares Management: Respective portfolio overlaps are around 60%.
- Blackstone and Morgan Stanley: Share the highest mutual exposure, with 36% of their portfolios consisting of loans to the exact same borrowers.
This high level of portfolio concentration raises fundamental questions about whether holding multiple BDCs actually provides meaningful diversification for institutional and retail investors.
Market Rebound Overlooks Underlying Risk
Despite these growing structural concerns, private credit stocks and manager shares have experienced a major rally over the past two months (July–August 2026):
- Blue Owl Capital shares are up 41%.
- Ares Management shares are up 34%.
- Morgan Stanley Direct Lending Fund (MSDL) shares are up 27%.
- Ares Capital Corp. (ARCC) shares are up 12%.
This rally stands in sharp contrast to the S&P 500's gain of under 4% over the same period, suggesting that public equity markets may be underestimating how tightly correlated the eventual default wave will be across these supposedly independent lending portfolios.