The Hidden Strain in Private Lending

Private credit has quietly taken a hit. Most publicly traded funding companies that lend to mid-sized businesses are now in the red. Why? Their loans are worth less than before, while their borrowing costs keep climbing. The problem is bigger than these firms alone. These lenders, called BDCs, act like banks without calling themselves one. They offer cash to companies that big banks often ignore. But lately, many of their loans went to software firms struggling under the weight of AI changes. Now, those loans are shrinking in value. At the same time, interest rates on their debts have jumped, squeezing profits even more. Earlier this year, nearly half of these firms reported losses for the first time in years. Their total earnings dropped from a positive $26 million to a negative $7. 6 million. Behind these numbers, over half of the lenders are now bleeding cash. This downturn isn’t just a bad quarter—it reveals deeper cracks in how private credit measures success.

Many of these firms use a trick to look healthier on paper. They borrow money in a way that counts future interest payments as income today. This payment-in-kind (PIK) trick boosts short-term numbers but hides real risks. Over a fifth of their reported earnings now comes from such borrowing, up from less than one-tenth before 2020. Investors often miss this fine print. Some funds also hide debt through legal structures like joint ventures. These loans don’t show up on official reports, so regulators can’t track them easily. For 14 of these funds, total borrowing hidden this way ballooned by 80% in 2025 alone. When you add that back in, their real financial weight is much heavier than disclosed. Market watchers warn this setup is unsustainable. Standard rules treat these loans as income, ignoring their true risk. But when AI keeps reshaping industries, loan values can swing wildly overnight. The recent losses may be a preview of harder times ahead.

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