Private credit firms are reportedly moving away from an industry perk called payment in kind.
As the Wall Street Journal (WSJ) reported Tuesday (Aug. 11), payments in kind (PIK) have become a widely-used “sweetener” in the private credit space, a sort of escape valve for borrowers that allows borrowers to defer cash interest payments.
Around 13.5% of new private credit loans originated in the second quarter had a PIK provision, the report said, citing investment-banking adviser Lincoln International. That’s down from 25% at the end of 2025. Now, lenders have more bargaining power, Brian Garfield, managing director at Lincoln International, told the WSJ.
“This is an evolution we are seeing unfolding now,” he said. “The pendulum is shifting.”
The report noted that lending standards in the private credit space are becoming more strict amid worsening loan performance and heightened scrutiny from investors.
Companies are extending less debt to borrowers being bought out by private-equity firms, particularly software firms and others susceptible to AI disruption, while also ending loopholes that permitted financing against borrowers’ assets.
This trend extends to PIK, which has become a crucial feature for borrowers seeking relief from payments, the WSJ report said. However, some private-credit executives and attorneys increasingly see PIK as an indication that a loan could sour as the deferred interest is added to the principal balance, ramping up the borrower’s debt.
The more extreme cases, like when interest deferral is requested after the loan’s origination, are viewed by some in the industry as “shadow defaults,” the report added.
This is happening amid increased oversight into the private credit market. The Federal Reserve has said that loan sizes in the space have increased, in many cases often exceeding $80 million, while many borrowers come from sectors where tangible collateral is limited.
“That combination raises questions about how risk is priced and how losses would be absorbed in a downturn,” PYMNTS wrote earlier this year.
Last week, the Federal Reserve Banks of Dallas and New York announced plans to launch a pilot survey of the U.S. private credit sector.
The banks say their voluntary survey will be for market intelligence purposes only, rather than for supervisory functions.
“After rapid growth in recent years, the U.S. direct lending market is estimated to be more than $1.3 trillion, comparable in size to both the high-yield bond and broadly syndicated loan markets,” the two Federal Reserve Banks said in a news release. “Unlike public credit markets, in which conditions can be tracked through public market data, visibility into new private credit lending activity is more limited.”
