The $2 Trillion Private Credit Market Is Cracking — Here’s What Investors Need to Know

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.

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.

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.

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%.

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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