As policymakers and regulators sharpen their focus on the growth of private credit, recent analysis from Moody’s Analytics has suggested that equity price movements of Business Development Companies (BDCs) may serve as early indicators of systemic risk, implying that stress in private credit could lead broader instability. In response, the Alternative Credit Council’s Global Head Jiri Krol has published this op-ed examining these claims.

BDC Price Movements Don’t Signal Private Credit Systemic Risk, but Differences in Transparency and Government Support

In its recent publication “Private Credit & Systemic Risk”, Moody’s Analytics claims that price movements in the shares of Business Development Companies (BDCs) lead those of large US banks, implying that stress in the private credit sector causes knock-on effects in the wider financial system. This is a serious charge—and one that collapses under scrutiny.

The authors rely on equity return data for both BDCs and large banks. Using statistical tools like Principal Component Analysis (PCA) and Granger-causality testing, they extract a “common factor” from each sector’s daily stock returns and assess whether BDC price movements systematically precede those of banks. The inference? That stress originates in private credit and is transmitted to the banking sector.

Setting aside the question of whether listed BDCs are the best proxy for private credit (they are not), the paper is a classic case of mistaking sequence for cause. Precedence in market movements does not imply causality—especially when there are at least three alternative explanations, each sufficient on its own to invalidate Moody’s conclusion.

First, BDCs offer investors significantly more transparency. These vehicles report loan-level data quarterly, allowing for timely and granular insight into asset quality. Banks, by contrast, disclose only aggregate information - leaving investors to infer asset quality from balance sheet trends, not from granular evidence. Banks also don’t have to mark their loans to their fair value like BDCs do. It’s therefore no surprise investors might price in risks in BDCs faster: they have better data, more accurate data. Moody’s is likely observing a transparency effect, not a contagion effect.

Second, BDCs and banks have different investor bases. BDCs are disproportionately held by retail investors seeking high yields. Retail behaviour is well documented as being more reactive and sentiment-driven than that of institutional investors, who dominate bank shareholding. Faster repricing in BDCs can therefore be a reflection of investor behaviour, not systemic fragility.

Third, since COVID, banks have benefited from an expanding array of policy backstops. In 2020, the Fed and the US government supported investment-grade corporate credit and small business loans, exposures that are more common on bank balance sheets, but not middle-market borrowers, which BDCs primarily serve. In 2023, banks were again shielded from market pressure through par-value repo facilities and deposit guarantees during the regional banking turmoil. These protections suppress volatility in bank equities—not because risks have vanished, but because investors believe the government will intervene.

Each of these factors—greater transparency, government protections, and investor composition—can explain why BDC equity prices might move before bank stocks. Taken together, they render the Moody’s causal interpretation untenable.

The Alternative Credit Council has long emphasised that private credit funds are not structurally comparable to banks. They are less leveraged, do not engage in maturity transformation, and operate with stable, committed capital. If anything, private credit reduces systemic risk by insulating banks from direct credit exposure to riskier borrowers.

Moody’s has highlighted a correlation visible in a part of the public market —but misread its meaning. Faster market reactions don’t mean private credit is causing stress. They reflect what investors can see, how they behave, and who they expect to be rescued. It’s time for a more rigorous conversation about systemic risk—grounded in facts, not faulty signals.