Key Takeaways
- Major asset managers including BlackRock, Morgan Stanley, and Cliffwater have imposed withdrawal restrictions on their private credit funds in early 2026
- Paid in Kind (PIK) loan arrangements — allowing borrowers to defer cash interest payments by adding them to principal — have surged from 5% to 11% of the market between 2022 and 2025
- The more troubling “bad PIK” category, where loans convert from cash payments to deferred interest mid-term, jumped from 2% to 6.4% by late 2025
- Publicly traded business development companies (BDCs) such as Ares Capital and Blue Owl are trading significantly below their stated net asset values
- JPMorgan has marked down certain private credit positions in software sector loans, citing potential artificial intelligence-driven disruption risks
The private credit industry, which ballooned to $2 trillion as traditional banks retreated from mid-sized business lending, is experiencing unprecedented strain. Several of the industry’s largest fund managers have implemented redemption restrictions, while an important stress indicator — Paid in Kind interest arrangements — has reached worrying levels.
Paid in Kind (PIK) interest represents a borrower’s inability to make scheduled cash interest payments. Rather than receiving cash, lenders agree to add unpaid interest to the outstanding loan balance. Despite receiving no actual payment, lenders book this deferred interest as current income.
According to Lincoln International, a firm that provides valuation services for approximately one-third of all U.S. private credit portfolios, PIK arrangements have more than doubled from 5% in early 2022 to 11% by the end of 2025. Even more troubling is the acceleration of “bad PIK” situations — loans that initially featured cash interest payments but were subsequently restructured to PIK terms. This category has tripled from 2% to 6.4% during the same timeframe.
“This is certainly a sign of stress,” said Ron Kahn, who runs Lincoln International’s valuation unit.
Major Funds Impose Redemption Restrictions
BlackRock’s HLEND fund activated withdrawal limitations for the first time after redemption demand exceeded its 5% quarterly threshold. The fund attracted $840 million in fresh capital during Q1 2026, falling significantly short of the $1.2 billion investors attempted to withdraw. Morgan Stanley implemented restrictions at one of its private credit vehicles, fulfilling only approximately half of investor withdrawal requests after they reached 10.9% of assets. Cliffwater similarly limited redemptions in its $33 billion fund to 7%, despite receiving requests totaling 14%.
These investment products were promoted to individual investors as offering “semi-liquid” access — providing quarterly redemption opportunities subject to percentage limitations. When redemption demand surpasses available liquidity, these protective caps activate, potentially trapping investor capital for extended periods exceeding one year.
Ares Capital derived approximately 15% of its net investment income from PIK arrangements last year. Blue Owl Capital reported that PIK interest accounted for 16% of net investment income in 2025. Blue Owl’s publicly traded shares have declined to below 80% of reported book value. Blue Owl Technology Finance, which concentrates on software company lending, has fallen below 60% of its stated net asset value.
Software Sector Loans Face Valuation Pressure
JPMorgan has reduced the carrying value of select private credit exposures to software businesses, expressing concern about potential business model disruption from artificial intelligence advancement. The financial institution has not disclosed specific companies affected by these write-downs.
PIMCO president Christian Stracke attributed the emerging stress to inadequate underwriting standards and insufficient transparency throughout the industry. PIMCO projects default rates will remain in the mid-single digit range for multiple years ahead, potentially compressing average private credit returns from approximately 10% down to a 6–8% range.
Blackstone president Jonathan Gray called current concerns “a ton of noise.” KKR’s CFO Robert Lewin acknowledged pressure at the firm’s publicly traded fund but said most of KKR’s capital sits outside that structure.
Companies that have converted to bad PIK status have experienced their leverage ratios climb to 76% of total assets by year-end 2025, a substantial increase from 40% in 2022, according to data from Lincoln International.
