The BDC Primer (Part 2)
The Complete Guide to Private Credit's Most Misunderstood Vehicle
The BDC Primer Part 1 (below) covered the plumbing. What BDCs are. How they make money. Where they blow up.
Now the harder question: how do you tell whether a BDC trading at 0.75x NAV is a bargain or a value trap?
The selloff has been indiscriminate. Names with clean portfolios are down alongside names with real problems. The market isn’t distinguishing. Which means opportunity exists, but only if you can figure out what the numbers are actually telling you.
That’s harder than it sounds.
BDC analysis isn’t like analyzing a normal company. Banks provision for expected losses; BDCs mark to fair value. That means there’s no provisioning buffer. Credit problems hit NAV directly when the marks move. The income statement mixes cash and non-cash items in ways that can obscure deteriorating credit quality. And the people driving the marks have discretion over timing that can delay bad news.
The metrics that matter aren’t the ones in the stock screener. Dividend yield tells you almost nothing useful on its own. Price/NAV is a starting point, not an answer. The real work is in NII composition, PIK trends, non-accrual trajectories, amendment activity, and a dozen other signals that don’t show up in a headline number.
This is Part 2. The metrics that matter versus the ones that mislead. How these things actually trade. What’s hiding in the portfolio. And why the manager you’re betting on matters more than the assets on the balance sheet.
What’s inside:
The metrics that actually drive returns (e.g., Price/NAV, NII coverage, ROE, PIK composition, leverage headroom, fee drag, etc.)
Why dividend yield is the least useful number
How BDCs trade and why discounts persist
The mark lag problem and what Level 3 accounting means for you
Portfolio quality: non-accruals, internal ratings, amendment activity, early warning signals
The shadow non-accrual metric most investors miss
Manager evaluation: fees, alignment, track record, platform conflicts
The structural issue suppressing BDC valuations that most investors have never heard of
This is the full framework: 6,000+ words, meant to be bookmarked and referenced. Read the details when you’re underwriting a name.
If you’re buying BDCs off dividend yield or a “cheap” Price/NAV screen, you’re guessing. This post is the checklist I use to separate bargains from value traps, the signals that show up before non-accruals spike, and how to sanity-check marks when the portfolio is Level 3 and management influences the cadence. By the end, you’ll be able to look at any BDC and know what’s real, what’s cosmetic, and what’s a red flag.