Key Takeaways
- Major asset managers BlackRock, Morgan Stanley, and Cliffwater imposed restrictions on investor redemptions during early 2026
- Loans using “Paid in Kind” (PIK) structures — allowing borrowers to defer cash interest by adding it to principal — increased from 5% to 11% of the private credit market between 2022 and 2025
- “Bad PIK” arrangements, where loans convert from cash payments to deferred interest mid-term, surged to 6.4% of total private credit loans by late 2025, compared to 2% in 2022
- Publicly traded business development companies (BDCs) such as Ares Capital and Blue Owl experienced share prices dropping below their net asset values
- JPMorgan reduced valuations on certain private credit positions linked to software sector borrowers, citing potential AI-driven business model disruption
The private credit industry, which expanded to $2 trillion as traditional banks retreated from middle-market financing, faces mounting challenges. Several prominent asset management firms have implemented redemption restrictions, while a critical distress indicator known as Paid in Kind (PIK) interest reaches concerning levels.
40% of private credit borrowers have negative free cash flow.
True default rate near 5%.
Morgan Stanley honored only 5% of redemption requests.
This isn’t a footnote. It’s the next crisis hiding in plain sight. pic.twitter.com/XQcQrTw6Fq
— Michael A. Gayed, CFA (@leadlagreport) March 13, 2026
The PIK interest mechanism allows borrowers facing cash flow constraints to defer interest payments. Rather than receiving cash, lenders capitalize the interest owed by adding it to the outstanding loan balance. Lenders recognize this capitalized interest as revenue despite receiving no actual cash flow.
⚠️US banks have nearly ~$300 billion in exposure to private credit:
Wells Fargo leads with $59.7 billion in loans to private credit funds, BDCs, and CLOs.
BDCs are publicly traded funds that give retail investors exposure to private lending, while CLOs are bundles of leveraged… pic.twitter.com/kbnR8EKQOI
— Global Markets Investor (@GlobalMktObserv) March 13, 2026
Data from Lincoln International, which provides valuation services for approximately one-third of U.S. private credit portfolios, reveals that PIK-structured loans grew from 5% in early 2022 to 11% by the end of 2025. The more troubling development involves “bad PIK” situations — loans originally structured with cash interest payments that subsequently convert to PIK terms. 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 Funds Activate Redemption Controls
BlackRock’s HLEND fund triggered withdrawal limitations for the first time after redemption requests exceeded its quarterly threshold of 5%. The fund attracted $840 million in fresh capital during Q1 2026, falling short of the $1.2 billion in redemption requests. Morgan Stanley reduced redemptions at one of its private credit vehicles to roughly half the requested amount after withdrawal demands reached 10.9%. Cliffwater implemented a 7% redemption cap on its $33 billion fund, well below the 14% investors requested.
Marketing materials for these vehicles positioned them as “semi-liquid” products, allowing quarterly redemptions subject to predetermined limits. When redemption demand surpasses available liquidity, these protective caps activate and can result in capital being restricted for extended periods beyond one year.
Ares Capital derived approximately 15% of net investment income from PIK arrangements during the previous year. Blue Owl Capital reported PIK income representing 16% of net investment income in 2025. Blue Owl’s publicly traded shares have declined to below 80% of stated net asset value. Blue Owl Technology Finance, concentrated in software sector lending, trades below 60% of book value.
Software Sector Loans Face Heightened Review
JPMorgan implemented valuation reductions on select private credit exposures to software companies, expressing concern about artificial intelligence’s potential to disrupt existing business operations. The financial institution has not disclosed specific borrower identities affected by these markdowns.
Christian Stracke, president of PIMCO, attributed the current challenges to inadequate underwriting standards and insufficient disclosure practices. PIMCO’s projections anticipate default rates reaching mid-single digit percentages over multiple years, potentially compressing average private credit returns from the 10% range down to 6–8%.
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.
According to Lincoln International analysis, borrowers utilizing bad PIK structures have experienced leverage ratios climbing to 76% of assets by year-end 2025, a significant increase from 40% in 2022.
