The private credit market was the focus of unwanted scrutiny in early 2026. While the asset class has long been positioned as resilient across cycles, events of the past year have revealed some weak patches in that resilience.

The pressure has been most acute in technology-focused direct lending. Advances in AI have raised fundamental questions about the durability of recurring revenue streams.

A significant cohort of borrowers – companies that had progressed beyond the early startup phase but had not yet achieved durable scale or profitability – accessed private credit during the aggressive deployment cycle of 2021–2022. All-in borrowing costs frequently fell in the 12% to 13% range.  

As growth rates moderated and capital markets tightened, these borrowers found themselves constrained. Revenue decline or deceleration, combined with rising interest rates that were left unhedged, rapidly eroded liquidity. Customary call protection further complicated options for borrowers.

The increased implementation of payment-in-kind (PIK) provisions on a post-closing basis has also raised concerns. PIK is a common feature in many lending arrangements and is often agreed to by lenders when competing for a mandate. As a general matter, PIK agreed to at the term sheet phase and included in the closing date loan document is not cause for concern.   However, PIK features introduced after the original loan closing often signal a company that is struggling to generate sufficient cash flow to service its debt and operate the business.  Lincoln International found that post-closing PIK showed up in around 6.4% of all private credit loans by year-end 2025, up from 2% of loans in 2022.

For many of these companies, viable alternatives are limited. The traditional bank market remains largely inaccessible given leverage profiles, negative free cash flow, and sector-specific risk aversion. As a result, restructuring has become, in many cases, the only viable path. Debt-to-equity conversions have become a common feature of stressed situations, with lenders increasingly stepping into ownership positions to preserve value and influence outcomes.

Lending to growing technology companies presented capital providers with attractive yields and equity co-investment opportunities tied to high-growth outcomes. It is now apparent that underperformance can lead to rapid enterprise value deterioration, leaving limited collateral support and few recovery levers. Unlike asset-heavy industries, there is often little tangible value to underpin recoveries. The IMF’s 2025 Financial Stability Report found that approximately 40% of private credit borrowers now have negative free cash flow, up from 25% in 2021.

The private credit landscape has seen dynamic growth and evolution over the past decade, and at times its success has seemed inevitable.

It would appear this asset class now confronts its first genuine credit cycle test against a backdrop of elevated rates, geopolitical instability, and AI-driven business model disruption. Looking ahead, the trajectory of the private credit market will depend in large part on how these stressed assets are resolved.