By AnnaMaria Andriotis

Goldman Sachs has been trying to clean up a mess inside its publicly traded private-lending company for more than three years. Investors are still unimpressed.

The bank's business-development company, Goldman Sachs BDC, is primarily a lender to middle-market corporations. Like all BDCs, it raises funds by selling shares, or taking on its own debt, and lends it out in bespoke private-credit deals, with the income paid out in dividends. Those dividends have made BDCs a popular investment for individuals.

Thanks to souring loans, the per share value of Goldman BDC's holdings has slid for seven straight quarters and its stock price has fallen even further. One analyst ranks Goldman BDC's credit performance as 25th of 26 publicly traded BDCs, not exactly a place the Wall Street titan is used to holding.

The company has changed management and restructured loans by delaying interest payments and extending maturity dates. It says it is doing better with recent loans and some of its metrics have improved in the past year while waiting on the old loans to be cleared out. Analysts say the old loans are still a sizable portion of the portfolio.

"Where we've seen continued write-downs is on the more legacy names where we are not seeing a big turnaround," David Miller, co-CEO of Goldman Sachs BDC, said on the company's earnings call last month. "But outside of those legacy names, we feel pretty good about the portfolio."

The multiyear process and sliding results could signal how private credit, which has dramatically expanded, may sour for investors. Loan restructurings can take years to sort through, tying up capital and dragging down values, keeping stocks under pressure. Many BDCs are down this year.

After banks and lenders took losses this fall on companies allegedly committing fraud, the market has been anxious about the potential that more blowups could be hiding inside the private-credit world. The Goldman BDC trouble shows what can happen with more benign issues.

"The principal problem is credit losses, which have been more severe over the last couple of years," said Wells Fargo's BDC analyst Finian O'Shea, who ranked Goldman BDC 25th based on the losses. "You see better performance under recent leadership, but their track record [with the BDC] is still young."

The BDC's total assets are about $3.4 billion of the roughly $162 billion that Goldman's private-credit business manages.

For many years, Goldman's BDC functioned almost like an island, separate from the rest of Goldman's private-lending asset management business. It bought loans tied to private-equity deals that were originated by other banks, according to former Goldman private-credit employees. Then it focused on lending directly to small and midsize companies, mostly backed by private-equity firms, ranging from fitness companies to a senior-care search engine. Some employees joked that the BDC wasn't really part of Goldman -- it was just renting Goldman's office space.

That changed after Goldman Chief Executive David Solomon brought all asset management teams under one umbrella and moved the BDC into its private-credit unit. Executives dug into the BDC's portfolio and told colleagues that the loans had underwriting issues, including some that had been made to companies with weak financials that should have never been approved, according to former Goldman private-credit employees.

The firm appointed longtime Goldman executives from the bank's internal private-credit business as new BDC leadership. Goldman also gave the BDC access to the private-equity deals Goldman's investment bank works on and the means to pursue deals tied to bigger companies alongside the rest of Goldman's private-credit business.

They are still dealing with loans that predated the changes.

Over the years, several fundings the BDC management highlighted publicly turned out to be weaker than projected shortly afterward. In the third quarter, 2.6% of its investment portfolio was essentially in default and presenting the risk of the BDC incurring a "substantial loss."

During the coronavirus pandemic, the BDC was part of a group of lenders to Thrasio, a digital consumer-goods company that was buying up third party sellers on Amazon. Sales for Thrasio surged in the 2020 pandemic, allowing it to raise funds from debt and equity investors at valuations worth several billion dollars.

For more than three years, the BDC has been marking down the value of the Thrasio financing. By late 2023, Goldman's BDC said it had moved at least some of those loans to nonaccrual status. In early 2024, Thrasio filed for bankruptcy, citing declines in online spending. That summer, the BDC said it had restructured a debt position with Thrasio, and that a loan with Thrasio remained in nonaccrual status.

A similar crash happened with Pluralsight, a technology-skills learning platform the BDC lent to in 2021, describing it as a "really attractive opportunity." By 2024, the BDC had placed Pluralsight loans in nonaccrual status and was working with other lenders on a restructuring.

When an analyst asked if the BDC would factor any lessons from the experience into future underwriting, a BDC executive said that Pluralsight was operating at "negative margins" when the BDC lent to it. Goldman executives say the BDC has stopped originating loans for companies that aren't generating cash flow.

Loan losses have taken a toll on the BDC's net asset value, or the value of its underlying investment portfolio after liabilities. NAV fell to $12.75 per share in the third quarter, down about 20% from $15.92 in 2021. The NAV is also down because of several special payouts to investors this year.

The BDC has been doing a variety of loan modifications to keep them out of nonaccrual status. That hasn't been enough to get some of those loans back on track.

There has also been a pickup in PIKs, short for payment-in-kind, which often involves delaying interest payments the borrower would have had to make, adding it to the loan's outstanding balance. While it lessens the amount the borrower has to pay today, it pushes potential problems down the road and delays the timing of the interest payments the BDC had expected.

Five years ago, PIK at Goldman's BDC trended at around 4% of its total investment income. It rose to about 12% last year, though fell to 8% in the third quarter.

Early this year, citing the expectation of the Fed's rate cuts and an increase in competition, the BDC lowered its dividend. Loan losses also contributed to the decision.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com

(END) Dow Jones Newswires

December 25, 2025 05:30 ET (10:30 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.