The worst news about private-credit losses and fund redemptions occurred earlier this year, but many business development companies that invest in the area hit new 52-week lows on Wednesday.

That could offer an opportunity for investors who are comfortable with the credit risk in the sector. BDCs recently traded at an average discount of 25% to their net asset values with the median BDC at a 32% discount, according to data from Accelerate, a Canadian alternative asset manager. The median is defined as the midpoint discount when all the BDCs are sorted based on their discounts or premiums to NAV.

The Van Eck BDC Income ETF, which owns stakes in some of the largest private-credit BDCs, touched a 52-week low of $11.90 Wednesday, down more than 10% over the past five weeks. The ETF rallied Thursday, helped by strength in the bond market, gaining 1% to $12.17, but its yield based on trailing one-year dividends is high at 13%.

BDCs like Ares Capital, Blackstone Secured Lending, and Blue Owl Capital Corp. make loans often yielding about 10% to smaller, junk-grade private companies. They then leverage those investments and pay ample dividends. Some of the deeply discounted BDCs now yield 15% or more.

"The headline risks have gotten less bad," says Julian Klymochko, the CEO and chief investment officer at Accelerate. He follows the BDC sector.

Earlier this year, there were some high-profile credit blowups, including software company Medallia. That caused investor outflows from private, non-traded BDCs that forced them to cap redemptions. All this was occurring amid rising concerns about the threat of artificial intelligence to the software industry, a major borrower in the private-credit market.

Since then, the credit backdrop has improved somewhat, private BDC redemptions remain high, but haven't gotten meaningfully worse, and the so-called "SAAS pocalypse" or risk to software companies from AI has receded. Publicly traded software stocks have surged almost 50% on average from April lows.

Higher short rates -- and the prospect for further increases in the coming quarters -- are bullish for the yield outlook for the BDCs. That is because their loans typically float at a spread -- often five to six percentage points -- above SOFR, the short rate benchmark now close to 4%. The downside is that BDC financing costs are heading higher.

What has caused the selloff in BDCs? It could reflect the weakness in financial stocks stemming in part from higher rates as many leading bank stocks are down 15% or more from their midyear highs.

Klymochko says some of the largest and best-known BDCs including Ares Capital and Blackstone Secured Lending have held up relatively well and trade close to NAV, but many smaller ones have been crushed with some trading at 35%-plus discounts to their second-quarter net asset values.

Those trading with 35% discounts or higher recently include Blue Owl Technology Finance, FS KKR Capital, New Mountain Finance and Midcap Financial Investment, according to data from Raymond James. These deeply discounted funds can yield 15% or more. Most companies report their asset values quarterly.

The big discounts on the public private-credit BDCs could contribute to continued high redemption requests at the large private funds like the big Blackstone Private Credit Fund known as Bcred, which has capped quarterly redemptions at 5% of net asset value.

There is incentive for wealth managers and their clients that hold the private funds to sell them and buy similar public BDCs -- often run by the same manager -- at a discounted price. The private funds are bought and sold at NAV, while the public funds trade at a premium or discount to NAV depending on investor demand.

So far, there doesn't appear to be a lot of this arbitrage going on despite the benefits to investors, in part because of lack of investment sophistication among many wealth managers and loyalty among some financial advisors to the fund managers.

That unwillingness to swap expensive private funds for cheaper public ones is a benefit to investors who can get access to cheaply priced private-credit funds in the stock market via public BDCs.