Return Comparison: Non-Traded BDCs vs. Credit Interval Funds

Credit interval funds and non-traded BDCs both provide individuals with access to private credit in a semi-liquid wrapper, but they are not direct substitutes. Due to regulatory constraints, BDCs primarily focus on direct lending to U.S. middle-market companies. Interval funds have more flexible mandates, allowing them to invest across a wider range of credit strategies. BDCs also focus on floating rate loans, while credit interval funds often have an allocation to fixed-rate instruments.

We can see how this fundamental difference affects the return profile for these products at a composite level by comparing the performance of SKRADD’s credit interval fund index (SKRADD-IFC) to its non-traded BDC index (SKRADD-BDC):

SKRADD’s non-traded BDC index (SKRADD-BDC) and credit-focused interval fund index (SKRADD-IFC) are value-weighted peer group benchmarks, comprised of the largest funds in each category and rebalanced annually. Learn more about SKRADD’s indices here.

Key Observations

• Absolute Returns: BDCs delivered stronger absolute returns with a 56% ITD total return compared to 38% for credit-focused interval funds.

• Volatility: Interval funds exhibited nearly double the volatility, suggesting greater exposure to market-sensitive or marked-to-market credit.

• Performance in Downturns: BDCs had only one negative quarter, in Q2 2022, falling -0.8% versus a -4.5% drop for SKRADD-IFC. This likely reflects the BDC index’s limited exposure to public market pricing and interest rate risk.

• Consistent Outperformance: BDCs outperformed in average quarterly return every year shown in the data, beating interval funds by roughly 70 bps per quarter on average.

• Strategy and Structure Drive Behavior: The return behavior of these indices reflects their underlying strategies. BDCs tend to hold directly originated, floating-rate senior loans with limited mark-to-market volatility. Interval funds’ flexible mandates allow them to shift focus across different credit sectors, resulting in a broader range of strategies and varying risk profiles.

Final Thought: These products are not interchangeable substitutes for private credit exposure. The data show that strategy, not just asset class, is the true driver of return behavior. Thus, it is critical for investors to look beyond the “semi-liquid private credit” label and evaluate each fund’s specific investment approach to make informed decisions.

Not investment advice.