Beware of Bargaining in Personal Loan & more related News Here

To paraphrase Winston Churchill, investing in a business-development company could be like buying a loan wrapped in a fund, inside a stock.

Some investors may be tempted to jump into these publicly traded private-debt vehicles, which are beset by concerns about the credit risks of borrowers such as software companies. Many of these vehicles are currently available at deep discounts to their asset values, sometimes with high dividend yields. They say be greedy when others are fearful.

But buying shares of a BDC is not the same as buying a loan or bond and simply collecting payments. And buying them cheap doesn’t mean you’ll get more for your money. In fact, it may make even more sense right now to look at those trading for a premium to their underlying net asset value.

For starters, many funds hold more than just loans. Their assets often also include equity stakes, sometimes in other lending funds. These equity investments may be the most difficult for investors to assess.

In addition, BDCs often earn various types of fee income through their lending. These can be collected when borrowers pay off their loan early by refinancing, or when a new loan is arranged. Fees may increase or decrease depending on how active the lending market is. This is a different risk than mere credit risk.

For example, Sixth Street Specialty Lending recently cited its outlook for a period of low fees when discussing its decision to reduce its quarterly base dividend. “It may take several quarters for activity-based fee income to return to normal after the market dislocation,” Bo Stanley, chief executive of Sixth Street Specialty Lending, told analysts.

Other characteristics of the loans made by BDCs also play a role in the fluctuations in their income. Some loan payments can be deferred, or what is known as payments in kind. The idea is that allowing the borrower to conserve cash can help him get through tough times.

But IOUs do not bring additional cash to the fund. They may therefore put pressure on a BDC’s ability to continue paying its dividends, even if all of its debt is technically current.

Returns on private-credit funds may exceed returns available on conventional loans or other forms of corporate credit. But that higher return may also reflect risks that differ from other loans. Researchers at Ohio State University argued in a recent study that returns to private-debt funds “should be measured with an approach that adjusts for both equity and debt-related risks.”

Mark Rowan, chief executive of Apollo Global Management, said many investors, particularly with BDCs, were looking for a more equity-like debt profile. “These are not people who have taken their Treasury portfolio or their investment-grade portfolio and moved into leveraged lending,” he told analysts on Apollo’s first-quarter call. “These are people who have sold their equity to go into leveraged lending.”

Thinking of BDCs like a stock might also suggest an odd path: focusing on funds trading at a premium to their net asset value.

For a healthy fund to take advantage of the current anxious market by giving high-value loans, it may need to raise more equity first. This is much easier for a fund that is not already trading at a large discount.

Sixth Street Specialty Lending is a BDC trading at a premium to its net asset value, which is currently around 10%. The stock declined after the company cut its dividend, causing premiums to decline.

But the dividends that have been foregone for now may not necessarily be gone forever. Sixth Street BDC tracks the so-called embedded fees it can earn from future activity. Some funds’ activity fees may also serve to protect them from having to repay loans early, which can be refinanced at shorter intervals. Meanwhile the ability to issue shares and lend at higher rates could also boost future fee income.

However, to maintain the premium, investors must also continue to have confidence that the fund’s loans are worth their value.

So despite all the other things going on at BDCs, there’s nothing mysterious about their core mission: making good loans.

Write to Telis Demos at Telis.Demos@wsj.com