TLDR

  • Private credit funds operated by BlackRock, Morgan Stanley, and Cliffwater all imposed limits on investor withdrawals in early 2026
  • “Paid in Kind” (PIK) loans — in which borrowers increase their debt rather than making cash interest payments — grew from 5% to 11% of private credit loans from 2022 to 2025
  • “Bad PIK” loans — cases where lenders shift from cash to IOU payments midway through a loan — reached 6.4% of all private credit loans by the end of 2025, up from 2% in 2022
  • Business development companies (BDCs) such as Ares Capital and Blue Owl have experienced stock prices dropping below their loan book values
  • JPMorgan reduced the value of certain private credit loans linked to software companies, sparking concerns about AI disruption in that sector

Private credit, the $2 trillion market that expanded quickly as banks retreated from middle-market lending, is now exhibiting signs of strain. Funds managed by some of the world’s largest asset managers have begun preventing investors from withdrawing their money, and a critical warning indicator — known as Paid in Kind (PIK) interest — is sending alarm signals.

PIK interest occurs when a borrower is unable to make cash interest payments on a loan. Instead, the lender adds the owed interest to the borrower’s overall debt. The lender still records this as income, despite no cash being exchanged.

Lincoln International, which assesses the value of approximately one-third of all U.S. private credit loans, reports that the proportion of loans using PIK terms increased from 5% in early 2022 to 11% by late 2025. Even more worrying is the growth of what analysts term “bad PIK” — situations where a loan that initially had cash payments is later switched to PIK halfway through. That number rose from 2% to 6.4% over the same timeframe.

“This is definitely a sign of stress,” stated Ron Kahn, who heads Lincoln International’s valuation division.

Redemption Gates Hit Major Funds

BlackRock’s HLEND fund imposed withdrawal limits for the first time after redemption requests exceeded its 5% quarterly cap. In Q1 2026, it received $840 million in new subscriptions, far less than the $1.2 billion investors attempted to withdraw. Morgan Stanley limited withdrawals at one of its private credit funds to roughly half of investors’ requests after withdrawal demands reached 10.9%. Cliffwater also set a 7% cap on withdrawals from its $33 billion fund, down from the 14% investors had sought.

These funds were promoted to retail investors as “semi-liquid” — meaning investors could redeem shares quarterly, up to a certain limit. When withdrawal demand outpaces available funds, those limits take effect, and money can be tied up for more than a year.

At Ares Capital, approximately 15% of last year’s net investment income came from PIK payments. Blue Owl Capital stated that PIK accounted for 16% of its net investment income in 2025. Blue Owl’s stock price has dropped below 80% of its loan book value. Blue Owl Technology Finance, which focuses heavily on lending to software companies, has fallen below 60% of its book value.

Software Loans Draw Scrutiny

JPMorgan reduced the valuation of certain private credit loans extended to software companies, citing worries about how artificial intelligence could disrupt their business models. The bank did not name the companies impacted.

PIMCO President Christian Stracke noted that the crisis originates from weak underwriting practices and a lack of transparency. PIMCO anticipates default rates in the mid-single digits for multiple years, which could pull average private credit returns down from roughly 10% to 6–8%.

Blackstone President Jonathan Gray described current concerns as “a lot of noise.” KKR’s CFO Robert Lewin recognized pressure at the firm’s publicly traded fund but noted that most of KKR’s capital is held outside of that structure.

Borrowers with bad PIK loans saw their debt levels increase to 76% of their assets by the end of 2025, up from 40% in 2022, per Lincoln International.