TLDR
- Major investment firms including BlackRock, Morgan Stanley, and Cliffwater have restricted investor redemptions in early 2026
- PIK (Paid in Kind) interest arrangements — where companies pile on debt rather than making cash payments — have surged from 5% to 11% of the private credit market between 2022 and 2025
- Loans converted mid-term from cash payments to PIK terms (“bad PIK”) jumped from 2% to 6.4% of total private credit by late 2025
- Major business development corporations (BDCs) including Ares Capital and Blue Owl are trading significantly below their net asset values
- JPMorgan has marked down certain software-sector private credit positions, citing potential AI-driven disruption risks
The private credit industry, which ballooned to $2 trillion as traditional banks retreated from mid-sized business lending, is facing its first major stress test. Several prominent asset management firms have implemented withdrawal restrictions, while a critical distress indicator — Paid in Kind interest — has reached concerning levels.
PIK interest represents a payment arrangement where struggling borrowers defer cash interest payments by adding them to their principal balance. Lenders record this deferred interest as revenue despite receiving no actual cash flow.
Lincoln International, responsible for valuing approximately one-third of U.S. private credit portfolios, reports that PIK-structured loans have more than doubled from 5% in early 2022 to 11% by the end of 2025. Even more troubling is the explosion of “bad PIK” arrangements — existing cash-pay loans converted to payment-in-kind terms — which skyrocketed 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.
Redemption Gates Hit Major Funds
BlackRock’s HLEND fund imposed withdrawal limitations for the first time after redemption requests 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 capped redemptions at one of its private credit vehicles to roughly half of investor requests, following withdrawal demands reaching 10.9%. Cliffwater similarly restricted redemptions in its $33 billion fund to 7%, despite investor requests totaling 14%.
These investment vehicles were promoted to individual investors as offering “semi-liquid” terms — allowing quarterly redemptions subject to established caps. When redemption demand outpaces available liquidity, these protective mechanisms activate, potentially trapping investor capital for extended periods exceeding twelve months.
At Ares Capital, approximately 15% of net investment income last year originated from PIK arrangements. Blue Owl Capital disclosed that PIK represented 16% of net investment income throughout 2025. Blue Owl’s shares have declined to below 80% of stated net asset value. Blue Owl Technology Finance, with concentrated exposure to software companies, has plummeted below 60% of book value.
Software Loans Draw Scrutiny
JPMorgan has written down valuations on select private credit exposures to software enterprises, expressing concerns regarding artificial intelligence’s potential to undermine existing business models. The institution has not disclosed specific affected portfolio companies.
PIMCO president Christian Stracke attributed the emerging crisis to inadequate underwriting standards and insufficient transparency throughout the industry. PIMCO projects default rates in the mid-single digits persisting for multiple years, potentially compressing average private credit returns from approximately 10% down to the 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 utilizing bad PIK arrangements have experienced leverage ratios climbing to 76% of total assets by year-end 2025, a substantial increase from 40% in 2022, per Lincoln International data.
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