PIK usage, ‘bad PIK’ trends and $21 billion in lender takeovers signal evolving portfolio stress, but strong fundamentals complicate the narrative
Lincoln International’s proprietary valuation data provides an unparalleled window into private credit portfolio health. With quarterly valuations of over 6,250 portfolio companies for more than 225 private equity sponsors and lenders, Lincoln’s indices reveal stress patterns invisible in public market data.¹ The picture emerging in 2025 is nuanced: strong fundamental performance coexisting with unmistakable signs of portfolio strain.
The Covenant Default Trajectory
“Covenant defaults increased for the third straight quarter, going from 2.9% to 3.4%,” Lincoln reported in its Q2 2025 Senior Debt Index.² While this level remains below the seven-year historical average of 4.4%, the trend direction has caught market attention. Fortune’s recent analysis put the number at 3.5% for current periods, up from 2.2% in 2024.³
Critically, Lincoln notes that “a higher default rate may be disguised by significant amendment activity to avoid potential defaults.”⁴ This suggests the headline default rate may understate actual portfolio stress, as lenders and sponsors work together to cure or waive technical breaches before they trigger formal default classifications.
The PIK Story: Good, Bad, and ‘Shadow Defaults’
Payment-in-kind interest—where borrowers defer cash payments by adding to principal—has emerged as a leading indicator of portfolio stress. “The percentage of debt investments with some sort of payment-in-kind increased to 11.4% in the quarter,” Bloomberg reported in August 2025, citing Lincoln data. “That compares with 7.4% in the third quarter of 2021, when the firm began tracking the data.”⁵
More concerning is the composition of PIK usage. Lincoln distinguishes between “good PIK”—structured into deals at origination—and “bad PIK,” which is added after initial closing when borrowers encounter unexpected difficulties. “The percentage of PIK deals that Lincoln regards as ‘bad PIKs’ is also on the rise,” Fortune reported. “In Q4 of 2021, only 36.7% of PIKs were bad. But in Q3 of 2025, that portion was 57.2%.”⁶
Lincoln’s Brian Garfield characterized this as a “shadow default rate,” noting that “LTV for these deals increased from 49% at close of the investment to 86%” currently—a dramatic deterioration in credit protection.⁷
Lender Takeovers: The $21 Billion Signal
Perhaps the most striking data point: “Lincoln has observed lenders with $21 billion of pre-takeover principal gaining control of businesses thus far in 2025, which is more than the amount of pre-takeover principal for such transactions from 2019 through 2024 combined.”⁸ This concentration of sponsor exits suggests that after years of amendments and support, some relationships have reached breaking points.
Vintage matters significantly. “Of the $17 billion of debt [in a prior six-month measurement], approximately $14 billion was related to companies in the 2021 or 2022 vintages, which made up around 70% of these transactions.”⁹ These peak-market deals, often executed at elevated valuations with aggressive leverage, have proved most vulnerable to the higher-rate environment.
The Paradox: Strong Fundamentals Persist
What makes the current environment particularly complex is that portfolio company fundamentals remain relatively healthy. “68% of companies in Lincoln’s database grew their revenue over the preceding 12 months, and 62% grew their adjusted EBITDA,” Fortune reported.¹⁰
“There’s cracks in the private markets,” Garfield acknowledged, but emphasized: “We’re not really seeing that it’s breaching the foundation.” This creates an unusual dynamic where stress indicators are rising even as operating performance holds steady—a reminder that capital structure issues can emerge independently of business fundamentals.¹¹
Ecosystem Implications
For Lenders: “Throughout 2024 we have observed lenders affording sponsors and portfolio companies flexibility in the form of PIK interest, covenant waivers, maturity extensions, and other borrower-favorable amendments,” Lincoln’s Ron Kahn noted. “However, private companies can only kick the can down the road for so long.”¹² Portfolio monitoring systems should incorporate PIK tracking and LTV deterioration metrics as early warning indicators.
For Private Equity Sponsors: The data on lender takeovers signals that sponsor support has limits. Continued investment in struggling portfolio companies must be weighed against the risk of “good money after bad” decisions. Clear-eyed assessment of when to continue supporting versus when to transition control to lenders has become a critical portfolio management skill.
For Investment Bankers: The vintage concentration of stress in 2021-2022 deals provides important context for current exit advisory. Companies in these vintages may face refinancing challenges or require restructuring conversations that affect sale processes and valuation expectations.
For Turnaround Advisors: The rising shadow default rate suggests growing demand for restructuring expertise, even in companies that haven’t yet triggered formal defaults. Early engagement—before relationships between sponsors and lenders deteriorate—offers better outcomes than crisis-mode intervention.
Looking Ahead
The Lincoln data presents a market at an inflection point. Strong operating fundamentals provide a foundation, but leverage accumulated during the low-rate era continues to pressure capital structures. “The private market story unfolding in front of us is fascinating—positive EBITDA growth continues but just is not great enough to de-lever portfolio companies,” Kahn observed.¹³
For middle market participants, the message is clear: monitor the signals, distinguish between cyclical stress and fundamental deterioration, and prepare for a period where restructuring expertise and relationship management will prove as valuable as deal origination capability.
Sources
¹ Lincoln International, “Q2 2025 Lincoln Senior Debt Index,” September 2025: https://www.lincolninternational.com/publications/research-indices/q2-2025-lincoln-senior-debt-index/
² Lincoln International, “Q2 2025 Lincoln Senior Debt Index,” September 2025: https://www.lincolninternational.com/publications/research-indices/q2-2025-lincoln-senior-debt-index/
³ Fortune, “Private credit deals see a rise in ‘bad PIKs’ showing ‘cracks’ in the market for corporate lending,” November 2025: https://fortune.com/2025/11/21/private-credit-bad-piks-cracks-in-the-market/
⁴ Lincoln International, “Q2 2025 Lincoln Senior Debt Index,” September 2025: https://www.lincolninternational.com/publications/research-indices/q2-2025-lincoln-senior-debt-index/
⁵ Bloomberg, “Private Credit’s PIK Usage Nears Four-Year High, Lincoln Says,” August 2025: https://www.bloomberg.com/news/articles/2025-08-12/private-credit-s-pik-usage-nears-four-year-high-lincoln-says
⁶ Fortune, “Private credit deals see a rise in ‘bad PIKs’,” November 2025: https://fortune.com/2025/11/21/private-credit-bad-piks-cracks-in-the-market/
⁷ PitchBook, “In stress measure, private credit lenders take over $17B of debt – Lincoln,” May 2025: https://pitchbook.com/news/articles/in-stress-measure-private-credit-lenders-take-over-17b-of-debt-lincoln
⁸ Business Wire / Lincoln International, “The Lincoln Private Market Index Records Another Quarter of Growth in Q2,” August 2025: https://www.businesswire.com/news/home/20250812373268/en/
⁹ Yahoo Finance / Lincoln International, “While the Lincoln Private Market Index Grew in Q1, Negative Trends are Brewing,” May 2025: https://finance.yahoo.com/news/while-lincoln-private-market-index-140000732.html
¹⁰ Fortune, “Private credit deals see a rise in ‘bad PIKs’,” November 2025: https://fortune.com/2025/11/21/private-credit-bad-piks-cracks-in-the-market/
¹¹ Fortune, “Private credit deals see a rise in ‘bad PIKs’,” November 2025: https://fortune.com/2025/11/21/private-credit-bad-piks-cracks-in-the-market/
¹² Lincoln International, “Modest Growth Appears in Lincoln’s Private Market Index – yet Cracks are Emerging,” August 2025: https://www.lincolninternational.com/perspectives/articles/modest-growth-appears-in-lincolns-private-market-index-yet-cracks-are-emerging/
¹³ Yahoo Finance / Lincoln International, “While the Lincoln Private Market Index Grew in Q1,” May 2025: https://finance.yahoo.com/news/while-lincoln-private-market-index-140000732.html