Top BDC portfolios contract in Q2 as origination activity falters – LCD analysis

Top BDC portfolios contract in Q2 as origination activity falters – LCD analysis

Zack Miller

Wed, August 12, 2026 at 8:58 PM GMT+3 3 min read

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Q2 loan sales and repayments outpaced new investment activity for a third consecutive quarter among the top publicly traded BDCs, driven by a decline in new origination volume.

Overall, the 12 largest BDCs originated $5.1 billion in total gross fundings in Q2, lower than $5.7 billion in Q1 and $8.0 billion in Q2 2025.

Sales and repayment volume declined to $7.5 billion in Q2, from $7.8 billion in Q1 and $8.2 billion in Q2 2025.

The top 12 BDCs all reported net outflows in the quarter ended June 30.

Ares Capital, the largest publicly traded BDC, was one of only two lenders to report a year-over-year increase in funding activity. The lender funded $2.9 billion in Q2, down from $3.4 billion in Q1, but up from the $2.7 billion posted one year earlier.

Oaktree Specialty Lending also increased its origination volume year-over-year to $235 million in the June quarter, from $143 million in the year-ago equivalent period.

But the majority saw transaction volume decrease. Blue Owl Capital, whose gross fundings volume shrank to $219 million in Q2, from $430 million in Q1 and $906 million one year earlier, attributed the drop in investment activity to a punishing environment for refinancing.

"As much as 50%, or even 75%, [of activity] in any given quarter came from refinancing or extension activity from existing portfolio companies," said Logan Nicholson, the BDC's president, on an Aug. 6 earnings call. "In a spread-widening environment like this, you see that activity grind to a halt."

According to LCD data, 53% of direct lending loans issued to PE-backed borrowers in Q1 priced tighter than S+500. That share sank to just 27% in Q2.

Ares attributed the activity decline to an uncertain macroeconomic backdrop on a July 29 earnings call, and noted that turbulence among retail investors had hamstrung some lenders in the upper end of the market.

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FS KKR Capital attributed the recent dearth of new deal activity in part to market uncertainty related to the Iran War. The lender posted $590 million in gross fundings against $1.3 billion in sales and repayments, driven by the sale of roughly $500 million in loans to third parties.

Notably, much of the new funding activity relates to deals committed to in previous quarters. While Goldman Sachs BDC reported funding $119 million in new investments, it only issued $13 million in new commitments in Q2 against $146 million in repayments.

Golub Capital BDC funded $69 million of new investments in Q2, but also issued just $13 million in new commitments. The lender said that it was committed to funding share buybacks and paying down debt rather than originating new loans; the overall Golub platform posted nearly $3 billion of commitments over the same time period.

FS KKR said that "almost all" of its $590 million in gross fundings were related to commitments in prior quarters or represented add-ons.

Morgan Stanley Direct Lending Fund said spreads had largely fallen below 500 bps for non-software assets as competition has increased for borrowers insulated from AI pressures. High-quality assets are likely to price close to S+475, said co-president Jeff Day.

Conversely, several lenders said they have seen promising signs for new deal spreads. Bain Capital Specialty Finance said its typical spreads on first-lien investments climbed to 570 bps in Q2, up from 550 bps in the prior quarter.

Golub said it had seen a 25-50 bps widening of spreads in Q2. The lender told investors it expected that the volume of repayments would increase in the coming quarters. Additional payoffs would allow the lender to "play more in new investing activity, and simultaneously continue to achieve our leverage goals and our repurchase goals."

Ray Massey/Getty Images

This article originally appeared on PitchBook News