In a development that could negatively affect private credit funds’ returns, U.S. banks are raising interest rates on loans to these funds as skepticism grows about the valuations assigned to their investments. According to three informed sources, since late last year, banks have been demanding higher rates for key debt sources, such as business development companies (BDCs), due to escalating doubts regarding lending standards and the performance of software companies in which they have invested. The current interest rate for credit facilities linked to special purpose vehicles — a common financing method — has risen to as much as 2 percentage points above the Secured Overnight Financing Rate benchmark, up from approximately 1.8 percentage points since last November. An increase in borrowing costs could hinder funds’ investment capabilities and their ability to finance daily operations, as noted by Morningstar banking analyst Sean Dunlop, who remarked that any interest expense will directly impact a private credit fund’s net interest income and internal rate of return (IRR). This predicament comes amid heightened scrutiny of the $2 trillion private credit market, particularly due to its vulnerabilities linked to the rise of artificial intelligence in the software sector. Investor sentiment has soured, leading to redemptions in several vehicles and significant declines in the stock prices of publicly traded funds. Concerns over valuation accuracy are causing banks to tighten their lending, reflecting a shift from the previous trend of decreasing rates for approximately 18 months prior. The implications of these rate adjustments are significant, as BDCs, which combined equity with leverage to issue loans to mid-sized firms, reported about $513 billion in assets as of late 2025. In light of these developments, industry experts are suggesting the era of prolonged low borrowing rates has come to an end.
