BDC Debt-to-Equity Ratio: The Leverage Number Every BDC Investor Should Check

TL;DR: A business development company's debt-to-equity ratio tells you how many dollars it has borrowed for every dollar of your equity, and the ceiling doubled in 2018 when SEC filings confirm the Small Business Credit Availability Act cut the required asset coverage ratio from 200% to 150%. Know this number before you know your BDC's yield, because a rising debt-to-equity ratio during a redemption wave is exactly the pattern preceding today's private credit stress.

Two Ratios, One Word: Leverage

If you own shares in a nontraded BDC, or you are considering one, you have probably seen the term "asset coverage ratio" in a prospectus. That is a regulatory floor, not a management decision. The debt-to-equity ratio is different. It is what the fund actually chose to do within that legal limit, and it is the number that tells you how aggressively a BDC's managers are using borrowed money to juice returns.

The formula is simple: total principal of outstanding debt divided by net assets, or net asset value. BCRED, Blackstone's private credit BDC, defines it exactly this way in its own shareholder letter, distinguishing it explicitly from the asset coverage ratio, which is calculated as total assets divided by total borrowings. Same underlying numbers, inverted and reframed for a different regulatory purpose. Confusing the two will lead you to misread a fund's actual risk profile.

How the Ceiling Doubled in 2018

Before 2018, the Investment Company Act of 1940, Section 61, capped BDCs at 200% asset coverage. In plain terms, that meant a BDC could borrow at most one dollar for every dollar of shareholder equity, a 1:1 debt-to-equity ceiling. The Small Business Credit Availability Act, signed in March 2018, amended Section 61(a)(2) to let a BDC's board, or its shareholders, approve a reduction of that coverage requirement down to 150%. At 150% coverage, a BDC can legally borrow up to two dollars for every one dollar of equity, a 2:1 debt-to-equity ceiling.

You can read the mechanics directly in SEC filings. OFS Capital Corporation's prospectus supplement spells it out plainly: at 150% coverage, "the BDC can borrow $2 for investment purposes for every $1 of investor equity." That single legislative change doubled the maximum leverage retail investors were exposed to in the nontraded BDC structure, and most retail marketing materials never explain it in those terms.

Doubling the ceiling did not mean every BDC doubled its leverage. Plenty of managers stayed conservative. BCRED reported 0.7x debt-to-equity as of December 31, 2025, well inside the 2x statutory ceiling, according to its own 2025 year-end shareholder letter. A fund running at 0.7x when it is legally allowed to run at 2.0x is telling you something about its risk appetite, and that gap between actual and allowed leverage is worth checking on any BDC you own.

Why the Trend Matters More Than the Snapshot

A single debt-to-equity reading tells you where a fund stands today. The trend tells you why. BCRED's leverage climbed from 0.7x at year-end 2025 to 0.8x by April 30, 2026, according to AltsWire's reporting, at the same time Q2 2026 redemption demand hit 10% of shares outstanding, exceeding the fund's standard 5% quarterly repurchase cap.

Put those two facts together and you get a specific pattern worth naming directly: leverage rose while the fund faced more redemption requests than its normal quarterly liquidity window could absorb. That is not automatically a crisis. It can mean the manager borrowed short-term to smooth out a temporary liquidity mismatch rather than firesaling portfolio assets into a soft market, which is often the more prudent choice. But it is also exactly the signature you want to catch early, because a fund that keeps borrowing to meet redemptions quarter after quarter, rather than the redemption pressure easing, is quietly compressing future returns for the investors who stay in.

Check three things every time you review a BDC's quarterly update. First, the debt-to-equity number itself, and how far it sits from the fund's stated 150% or 200% coverage requirement. Second, the direction of the trend over the last three to four quarters, not just the current figure. Third, whether rising leverage lines up with a redemption cycle, a deployment cycle, or both. A fund actively deploying into new loans looks different on paper from a fund borrowing to pay off investors trying to leave, even when the headline leverage number looks identical.

Where to Actually Find This Number

You do not need a Bloomberg terminal to check a BDC's debt-to-equity ratio. Nontraded BDCs publish periodic shareholder letters and NAV updates that state leverage explicitly, exactly the way BCRED's own year-end letter did when it disclosed 0.7x debt-to-equity as of December 31, 2025 against the fund's 2x statutory ceiling. Publicly traded BDCs disclose the same figure in quarterly 10-Q filings on SEC EDGAR, alongside the underlying asset coverage ratio calculation required by Section 18 of the Investment Company Act.

Do not stop at the current number. Pull the last four to six shareholder letters or 10-Qs and build your own small table of debt-to-equity over time. AltsWire's own tracking of BCRED showed leverage moving from 0.7x to 0.8x across four months as redemption demand climbed past the fund's standard 5% quarterly cap, a trend that would be invisible from a single snapshot but is unmistakable once you line up several quarters side by side. That five-minute exercise, reading a few consecutive shareholder letters instead of just the most recent one, is the single highest-leverage due diligence step, no pun intended, that most retail BDC investors skip.

The Bottom Line

The 2018 rule change that doubled BDC leverage capacity did not create risk on its own. It created room for managers to choose how much risk to take on, and that choice is exactly what the debt-to-equity ratio reveals. A manager sitting well below the statutory ceiling, the way BCRED did at 0.7x against a 2x limit, is telling you it is choosing restraint over maximum yield extraction. A manager climbing toward that ceiling during a redemption wave is telling you something different, and your job as an investor is simply to notice which story your fund's own numbers are actually telling.

For more on this, see our coverage of The 300% Asset Coverage Test: The Leverage Rule Behind Every BDC and Interval Fund, Non-Traded BDC Investing: What Accredited Investors Need to Know, and BDC Discounts to NAV Are Flashing a Warning the Market Won't Ignore.

Frequently Asked Questions

What is a BDC's debt-to-equity ratio?

It is the total principal of a business development company's outstanding debt divided by its net asset value, showing how many dollars of borrowed money the fund uses for every dollar of investor equity.

How is debt-to-equity different from asset coverage ratio?

Asset coverage ratio is calculated as total assets divided by total borrowings and represents a regulatory minimum set by the SEC. Debt-to-equity ratio is the actual leverage a fund's managers chose to employ within that legal limit, using the same underlying figures but expressed differently.

What changed for BDC leverage in 2018?

The Small Business Credit Availability Act amended Section 61(a)(2) of the Investment Company Act, allowing qualifying BDCs to reduce their required asset coverage ratio from 200% to 150% with board or shareholder approval, effectively doubling the maximum allowed debt-to-equity ratio from 1:1 to 2:1.

Should I worry if my BDC's debt-to-equity ratio is rising?

Not automatically, but check why. Rising leverage during a period of heavy redemption requests, particularly if it exceeds the fund's normal quarterly repurchase cap, can signal the manager is borrowing to fund exits rather than deploying new capital, which is worth a direct question to your advisor or the fund manager.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.