The private credit sector, which has grown rapidly to $2 trillion as mainstream banks scaled back lending to medium-sized businesses, is now facing significant pressure. Major asset managers, including BlackRock, Morgan Stanley, and Cliffwater, have implemented or tightened restrictions on investor redemptions, while signs of stress have intensified within the industry’s underlying loan structures.
PIK Interest Surges Amid Financial Stress
Private credit funds have increasingly relied on Paid in Kind (PIK) interest agreements, which allow companies to defer cash interest payments by adding interest to their outstanding loan balances. This trend points to growing financial strain, as more borrowers lack the cash flow to meet regular payment obligations. Lincoln International, a leading firm tasked with valuing around one-third of U.S. private credit portfolios, calculated that PIK loan structures doubled from 5% in early 2022 to 11% at the end of 2025. More concerning is the volume of so-called “bad PIK” loans — cases where cash payment loans are converted mid-term to PIK — which jumped from 2% to 6.4%.
Lincoln International is recognized for its independent valuations across the U.S. alternative investment sector. The group’s findings are closely followed for signals of credit quality deteriorating. Ron Kahn, leader of the valuation team, described the increase in PIK and bad PIK loans as a clear marker of industry-wide stress.
“This is certainly a sign of stress,” commented Ron Kahn, referencing the spike in distressed loan structures.
Funds Respond With Redemption Limits
Withdrawal restrictions, sometimes referred to as “gates,” have been activated across high-profile funds. BlackRock’s HLEND, a private credit fund, limited redemptions for the first time after experiencing requests totaling more than double the allowed quarterly maximum. The fund recorded $840 million in inflows during Q1 2026, but investor demands for withdrawals reached $1.2 billion. Morgan Stanley restricted withdrawals from one of its vehicles to about 50% of requested redemptions following a surge in withdrawal applications. Cliffwater’s $33 billion private credit fund capped redemptions at 7% versus investor requests of 14%.
These funds, often sold to retail investors with promises of “semi-liquid” access, only allow redemptions up to predefined quarterly limits. When investors try to withdraw more than the available liquidity, additional limitations automatically engage, establishing potential roadblocks to accessing invested capital for periods exceeding a year.
Business development corporations like Ares Capital and Blue Owl Capital have also been impacted. At Ares Capital, 15% of last year’s net investment income came from PIK loans. Blue Owl relied on PIK income for 16% of its annual results. Shares of Blue Owl have dropped below 80% of the reported net asset value, and its software-focused arm trades at less than 60% of book value.
Industry Responds To Risks In Software Lending
JPMorgan has reduced the marked value of certain private credit investments exposed to the software sector, citing the risk that artificial intelligence could upend existing business models in that industry. While JPMorgan hasn’t specified which holdings have been impacted, these write-downs highlight fears of sector-specific disruption and a tougher overall lending climate.
Christian Stracke, president of PIMCO, attributed the troubles to weak underwriting standards and insufficient transparency. PIMCO now forecasts default rates in the middle single digits for several years, which may lower average returns in private credit from previous norms near 10% to a narrower range around 6–8%.
Blackstone president Jonathan Gray described the market turmoil as “a ton of noise.” KKR’s CFO Robert Lewin observed that although their public fund is under pressure, the majority of KKR’s capital is invested outside of that structure.
Borrowers making use of bad PIK arrangements experienced a sharp increase in leverage, reaching 76% of assets by late 2025 versus 40% three years earlier, according to data from Lincoln International.
