Private Credit Hit $4.1 Trillion as More Borrowers Stopped Paying Cash Interest

Private credit crossed a new headline threshold in 2025: global assets under management reached US$4.1 trillion, up 17 percent for the second year running, according to an industry release. At face value the number looks like a vote of confidence; fundraising in the first half of 2026 was the highest in five years.

But two fresh pieces of primary research point to strain beneath that growth. A Federal Reserve Bank of Boston paper flags rising payment-in-kind activity, compressed spreads, and concentrated exposures inside business development company portfolios. And a National Bureau of Economic Research paper shows semi-liquid private credit vehicles have grown fast enough that their redemption mechanics create run-like dynamics.

The headline numbers and the caveat

The industry report that tallied US$4.1 trillion of private credit also emphasizes some familiar structural features: about 41 percent of flagship corporate lending funds operate without investment leverage, and funds' borrowing is estimated at roughly US$399 billion, or about 25 percent of net AUM. The same report says credit quality across loan portfolios remains broadly stable, while noting signs of stress concentrated in particular market segments.

More payment-in-kind, tighter spreads, heavier concentration

The Boston Fed team analyzed SEC filings for 168 BDCs, roughly 890,000 company-quarter loan observations since 2022, and surfaced a set of early warning signals. The share of BDC loans taking payment-in-kind interest rose from about 6 percent to roughly 10 percent by early 2026, a 67 percent increase over three years. At the same time the median BDC lending spread sits about 4 to 5 percentage points over SOFR, versus roughly 2 percentage points for high-yield term loans, yet BDC spreads have narrowed by about one percentage point over the past two years.

That pattern, rising payment-in-kind usage even as lending spreads compress, sits beside concentrated sector exposures. Internet and software companies are the largest share of the median BDC's holdings by loan count, at about 20 percent, and some BDCs have more than one-third of lending concentrated in technology. The same paper notes that BDC equities fell roughly 20 percent relative to the broad market from early 2025 to mid-2026. Taken together, the Boston Fed summarizes the concerning signs as rising deferrals, compressing spreads, and concentrated exposures in a market that otherwise remains largely opaque.

Semi-liquid funds and the mechanics of a run

The NBER paper focuses on a different, but related, vulnerability: semi-liquid private credit funds. These vehicles grew from roughly US$10 billion in 2019 to more than US$300 billion by 2025. They permit redemptions at net asset value through quarterly repurchase offers typically capped at 5 percent of shares outstanding, yet the paper finds that cash buffers and contractual loan repayments are insufficient to fund repeated 5 percent quarterly redemptions.

When outflows rise, inflows tend to decline; the paper documents that net outflows are met with sales of illiquid loans, external borrowing, and delayed payments through repurchases payable. Those actions impose liquidation and leverage costs on the investors who remain. The mechanics amplify themselves: loan liquidation, leverage increase, and NAV inflation can feed run-like redemptions. By 2026Q1 repurchase outflows reached US$8.4 billion, nearly matching inflows from issuance and reinvestment combined, and the authors caution that semi-liquid BDCs may see aggregate net outflows for the first time in coming quarters.

Where the tension comes from

Layer these findings onto the industry totals and the picture looks mixed. Global AUM growth and active fundraising coexist with growing reliance on semi-liquid wrappers that promise regular redemptions despite holding illiquid loans. Bank funding has expanded too: committed bank credit to BDCs rose from about US$10 billion in 2013 to more than US$50 billion by 2025, with utilization near US$35 billion. The Boston Fed stresses that this still amounts to less than 2 percent of large banks' Tier 1 capital, but banks reported tightening standards for business credit intermediaries and private equity funds in the April 2026 Senior Loan Officer Opinion Survey.

What to watch next

For now the three sources describe different slices of the same market: robust headline expansion, signs of credit friction inside BDCs, and mechanical fragility in semi-liquid funds. The trade body's report couches the US$4.1 trillion tally in generally stable portfolio quality, while the Boston Fed and the NBER call attention to concentrated risks and liquidity mechanics that can turn localized stress into broader dislocation. Which view prevails depends on flows and on whether redemptions, deferrals, or bank-line strains accelerate. The situation is still developing.

Policymakers, investors, and managers will be watching net outflows, payment-in-kind incidence, and the interaction between quarterly repurchase caps and secondary-market depth. If the early-warning signals flagged in the filings and the repurchase data intensify, the industry's growth story and its claimed stability could look less aligned with the stresses already visible in its own disclosures.