Key Takeaways
- Major financial institutions including BlackRock, Morgan Stanley, and Cliffwater have imposed withdrawal restrictions on private credit funds in early 2026
- Paid in Kind (PIK) loans — arrangements where borrowers roll unpaid interest into principal debt rather than making cash payments — have surged from 5% to 11% of private credit portfolios between 2022 and 2025
- The more problematic “Bad PIK” category, representing loans converted from cash-paying to payment-in-kind status, jumped to 6.4% of total private credit by late 2025 from just 2% in 2022
- Publicly traded business development companies (BDCs) such as Ares Capital and Blue Owl are trading at discounts to their net asset values
- JPMorgan has marked down certain private credit exposures to software companies, citing potential AI-driven disruption risks
The private credit industry, which ballooned to $2 trillion as traditional banks retreated from middle-market commercial lending, is experiencing notable stress. Several prominent asset management firms have implemented restrictions preventing investors from redeeming their capital, while a critical distress indicator — Paid in Kind interest arrangements — has reached concerning levels.
Paid in Kind (PIK) interest represents an arrangement where borrowers unable to service their debt with cash payments instead have the accrued interest added to their outstanding loan balance. While lenders recognize this as revenue on their books, no actual cash flow occurs.
According to Lincoln International, a firm responsible for valuing approximately one-third of all private credit loans in the United States, the proportion of loans incorporating PIK structures increased from 5% in early 2022 to 11% by the end of 2025. Even more troubling is the growth of “bad PIK” arrangements — loans that originally featured cash interest payments but were subsequently converted to PIK structures. This category expanded 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 Asset Managers Impose Withdrawal Restrictions
BlackRock’s HLEND fund implemented its first-ever withdrawal limitations after redemption demands 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 imposed restrictions on one of its private credit vehicles, honoring approximately half of investor withdrawal requests after demands reached 10.9%. Cliffwater similarly limited redemptions in its $33 billion fund to 7%, well below the 14% requested by investors.
These investment vehicles were promoted to individual investors as “semi-liquid” products — permitting quarterly redemptions subject to predetermined limits. When withdrawal demand surpasses available capacity, these restrictions activate and can trap investor capital for periods exceeding one year.
Ares Capital derived roughly 15% of its net investment income from PIK payments last year. Blue Owl Capital reported that PIK arrangements accounted for 16% of net investment income in 2025. Blue Owl’s shares have declined to below 80% of its reported net asset value. Blue Owl Technology Finance, with concentrated exposure to software sector borrowers, has dropped below 60% of book value.
Technology Sector Lending Under Pressure
JPMorgan has reduced valuations on select private credit loans to software companies, expressing concerns about potential artificial intelligence disruption to their operating models. The financial institution declined to specify which portfolio companies were impacted.
PIMCO president Christian Stracke attributed the current challenges to inadequate underwriting standards and insufficient transparency. PIMCO projects default rates in the mid-single digits persisting for multiple years, 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.
Borrowers classified as bad PIK have experienced leverage ratios climb to 76% of assets by the conclusion of 2025, up substantially from 40% in 2022, based on Lincoln International’s analysis.
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