Top BDCs for Capital Appreciation in a Rising Rate Environment

In a world where central banks are tightening monetary policy to combat inflation, investors are increasingly turning to alternative assets that thrive in higher-rate environments. Business Development Companies (BDCs) stand out as a compelling option, offering high-yield portfolios, disciplined credit strategies, and the potential for capital appreciation. Two BDCs—NewtekOne Inc. (NEWT) and PennantPark Floating Rate Capital (PFLT)—emerge as standout candidates for 2025, combining operational excellence, diversified credit exposure, and undervalued equity.

The Case for BDCs in a Rising Rate World

BDCs are uniquely positioned to benefit from rising interest rates. Their focus on floating-rate loans allows them to widen net interest margins as rates climb, while their pass-through tax structure ensures that gains flow directly to shareholders. For income investors, BDCs also offer attractive dividend yields, often exceeding 10%, and a track record of consistent payouts. However, not all BDCs are created equal. The key to success lies in identifying those with strong management teams, resilient portfolio companies, and diversified credit exposure to mitigate risk.

NewtekOne Inc. (NEWT): A Niche Lender with Explosive Growth

NewtekOne (NEWT) is a rare BDC with a unique edge: it is one of the few BDCs licensed to originate SBA-guaranteed loans. This niche focus allows it to target small- and medium-sized businesses (SMBs), a segment less sensitive to macroeconomic volatility than large-cap corporate borrowers. In Q1 2025, NEWT's net interest income surged 56.4% year-over-year, and total assets ballooned to $2.1 billion—a 52.1% increase. Its net interest margin expanded to 3.04%, reflecting efficient capital deployment.

NEWT's portfolio is further insulated by its SBA lending expertise, which provides downside protection through government guarantees. With a 6.5% dividend yield and a price-to-book ratio near 0.90, the stock is trading at a discount to its intrinsic value. Analysts highlight its disciplined underwriting and growth potential in the SMB sector, making it a compelling buy for investors seeking both income and capital appreciation.

PennantPark Floating Rate Capital (PFLT): A High-Yield Powerhouse

PennantPark (PFLT) is a masterclass in leveraging floating-rate loans. With 89% of its portfolio tied to variable rates, PFLT's net interest income expands as rates rise—a critical advantage in 2025. The company's weighted average yield on debt investments stands at 10.5%, and its 11.5% dividend yield is among the highest in the BDC space. Despite a Q1 earnings miss, PFLT maintained its monthly dividend of $0.1025 per share, underscoring its commitment to shareholder returns.

Historically, PFLT has experienced a negative market reaction when it misses earnings expectations. From 2022 to the present, the stock has seen a maximum single-day return of -1.23% on the date of earnings misses, indicating a tendency for underperformance in such scenarios. This highlights the importance of monitoring earnings trends while recognizing the company's resilience in maintaining payouts.

PFLT's portfolio of $2.34 billion is diversified across 329 issuers, reducing concentration risk. Its strategic joint venture with Hamilton Lane, set to launch in late 2025, aims to grow the portfolio to $500 million, further amplifying its earning potential. With a price-to-book ratio of 0.96 and a 14-year history of uninterrupted dividends, PFLT is undervalued and primed for a rebound. Analysts have set price targets ranging from $11 to $12, suggesting a 10–15% upside from current levels.

Why Act Now?

Both NEWT and PFLT are trading at discounts to their book values, a common feature of BDCs but one that often corrects over time. NEWT's SBA lending expertise and PFLT's floating-rate focus position them to outperform in a rising rate environment. Additionally, their strong management teams—led by executives with decades of experience—ensure disciplined capital allocation and risk management.

For investors seeking immediate entry points, these BDCs offer a rare combination of high-yield dividends, capital preservation, and growth potential. While the broader market grapples with rate uncertainty, NEWT and PFLT provide a roadmap to capitalize on the shifting landscape.

Final Thoughts

The BDC sector is not without risks—credit defaults and interest rate volatility remain concerns. However, for investors who prioritize operational discipline and diversified credit exposure, NEWT and PFLT represent a compelling opportunity. Their undervalued equity, resilient portfolios, and alignment with macroeconomic trends make them ideal candidates for a rising rate world. As the Fed continues its tightening cycle, these two BDCs are poised to deliver outsized returns for those who act now.