TLDR
- Private credit funds at BlackRock, Morgan Stanley, and Cliffwater have all limited investor withdrawals in early 2026
- “Paid in Kind” (PIK) loans — where borrowers add to their debt instead of paying cash interest — rose from 5% to 11% of private credit loans between 2022 and 2025
- “Bad PIK” loans, where lenders switch mid-loan from cash to IOU payments, hit 6.4% of all private credit loans by end of 2025, up from 2% in 2022
- Business development companies (BDCs) like Ares Capital and Blue Owl have seen stock prices fall below their loan book values
- JPMorgan has cut the value of some private credit loans tied to software companies, raising fears about AI disruption to that sector
Private credit, the $2 trillion market that grew rapidly as banks pulled back from middle-market lending, is now showing cracks. Funds run by some of the world’s biggest asset managers have started blocking investors from taking their money out, and a key warning signal — called Paid in Kind (PIK) interest — is flashing red.
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
PIK interest happens when a borrower cannot pay cash interest on a loan. Instead, the lender adds the interest owed to the borrower’s total debt. The lender still counts this as income, even though no cash changes hands.
⚠️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
Lincoln International, which values roughly a third of all U.S. private credit loans, says the share of loans using PIK terms rose from 5% in early 2022 to 11% by late 2025. More concerning is the rise of what analysts call “bad PIK” — cases where a loan that started with cash payments is later switched to PIK mid-term. That figure climbed from 2% to 6.4% over the same period.
“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 limited withdrawals for the first time after redemption requests broke through its 5% quarterly cap. It received $840 million in new subscriptions in Q1 2026, well short of the $1.2 billion investors tried to pull out. Morgan Stanley restricted withdrawals at one of its private credit funds to around half of what investors requested, after withdrawal requests hit 10.9%. Cliffwater also capped its $33 billion fund withdrawals at 7%, down from the 14% that investors sought.
These funds were marketed to retail investors as “semi-liquid” — meaning investors could redeem quarterly, up to a cap. When withdrawal demand exceeds supply, those caps kick in and money can be locked up for over a year.
At Ares Capital, about 15% of net investment income last year came from PIK payments. Blue Owl Capital reported PIK at 16% of net investment income in 2025. Blue Owl’s stock has fallen below 80% of its loan book value. Blue Owl Technology Finance, which lends heavily to software firms, has fallen below 60% of book value.
Software Loans Draw Scrutiny
JPMorgan has cut the value of some private credit loans to software companies, citing concerns about how artificial intelligence may disrupt their business models. The bank did not identify which companies were affected.
PIMCO president Christian Stracke said the crisis stems from poor underwriting and a lack of transparency. PIMCO expects default rates in the mid-single digits for several years, which could drag average private credit returns down from around 10% 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.
Bad PIK borrowers have seen their debt levels rise to 76% of assets by end of 2025, up from 40% in 2022, according to Lincoln International.
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