Quick version. Private credit funds are paying out more of their income as IOUs instead of cash, and many are limiting how much money investors can take out. You still pay tax on that IOU income, even if the cash never shows up.

What even is this?

  • Private credit fund. A fund that lends money straight to companies, the way a bank would. Many are sold to ordinary investors as business development companies (BDCs) or interval funds.
  • PIK interest. Short for payment in kind. Instead of paying interest in cash, the borrower adds it to the loan. A $10 million loan at 10% becomes an $11 million loan a year later, with no cash changing hands.
  • RIC. Most of these funds are taxed as regulated investment companies. A RIC pays no corporate tax if it hands at least 90% of its taxable income to investors each year. You then pay tax on what it pays out.

The story

What happened. PIK has become a big part of what these funds earn. In the first quarter of 2026, PIK made up about 9.8% of what BDCs earned, according to Federal Reserve Bank of Boston data reported by InvestmentNews and tracked by Yardeni Research.

At the same time, investors want out. Many of these funds let you sell back only 5% of the fund each quarter. In the third quarter, investors asked to pull 16.8% of Blue Owl's OCIC fund and 16% of a $31 billion Cliffwater fund, according to Yardeni's tracker. Both kept to their 5% caps, so most people who asked had to wait.

Here's where tax comes in. The tax code treats PIK interest as income the day it builds up, cash or no cash. A fund taxed as a RIC has to count it when it works out the 90% it must pay out. So the fund has to hand out cash for income it hasn't collected. It finds that cash elsewhere, from other loans, from selling assets, or from new investors' money.

Why now. Higher interest rates have squeezed some borrowers. Letting them pay in IOUs keeps loans from defaulting on paper. The Federal Reserve Bank of New York has started reviewing bank lending to private credit firms, and the SEC has warned funds about how they value their loans.

What it means for funds

For credit funds. A fund with a lot of PIK can report strong income while collecting little cash to fund its payouts. PennantPark, a BDC manager, makes this point when it warns investors to look past headline yields. The fund also owes a 4% excise tax on income it fails to pay out on time, so holding cash back has a cost. Managers have to juggle three things at once. They have to pay out enough to keep their tax status, meet withdrawal requests and keep enough cash on hand.

Why you should care

Say you put $100,000 into a private credit fund yielding 10%. You receive $10,000 in payouts and pay income tax on all of it. Suppose $1,000 of that income was PIK interest from a struggling borrower. If that borrower later fails, the fund books a loss, but you already paid tax on $1,000 that never arrived. Meanwhile, if you want your money back, the fund may give you only part of it this quarter.

This is the classic phantom income problem. You owe tax on money you haven't received.

What to watch next

  • PIK levels in BDC quarterly reports, published in early November for the third quarter.
  • Withdrawal requests at the big funds for the fourth quarter.
  • Regulators. Watch the New York Fed review and any SEC action on how funds value their loans.

Sources (go double check us)

This is plain English information, not tax advice.