BDCs

If you are willing to do the research, this cycle could present some opportunities at some point, but there are definitely some risks to consider:

1. Credit cultures vary widely at BDCs and the underlying assets can range from senior secured loans to second lien (and even some equity). Also, remember that cov-lite and even some PIK deals are prevalent in some portfolios.

1. Many funds use fund level leverage. Make sure you understand the covenants on this debt, because a disaster scenario for a BDC would be if it was forced to fire sale assets by its lenders.

1. Develop a view on the duration and severity of this credit cycle. Think through both prevalence of defaults and also recovery values.

1. Develop a view on Fed monetary policy. Higher rates could increase current yield, but also will likely increase default risk. Conversely, if you look at the forward curve, the market expects rates to come down, which will lower your current yield.

1. BDCs can trade well below NAV and the discount can persist.

1. Liquidity can be thin in certain public tickers.

1. Understand the management agreement. The fee drag can be high.

Personally, I think we are too early in the cycle for this trade, but there may be an opportunity later if better managers start trading at significant discounts to NAV because money is fleeing the asset class.