TL;DR
The private credit market is navigating a severe structural test as direct lenders rapidly pivot away from software buyouts to hard, physical assets. To manage mounting credit stress, lenders are increasingly relying on payment-in-kind (PIK) amendments and secondary portfolio offloads to defer losses and unlock liquidity. However, high-profile equity wipeouts like Medallia and forced balance-sheet restructurings are exposing the limits of these defensive maneuvers.
The "Anything But Software" Pivot
Direct lenders are fleeing the once-beloved software-as-a-service (SaaS) sector in favor of tangible, asset-heavy businesses as a looming refinancing wall and high-profile tech defaults trigger an industry-wide reassessment.
"We’re going to continue to be cautious around software... It’s an area that’s moving quickly, and we’re going to continue to be cautious about deployment." — AI and SaaS Concentration Risk in Private Credit — Underwriting Deterioration and the Medallia Takeover Case Study
(via Bloomberg)
This defensive rotation has intensified following the creditor takeover of software firm Medallia Inc., which wiped out a massive equity investment by Thoma Bravo, and a looming $150 billion software maturity wall coming due through 2029 AI and SaaS Concentration Risk in Private Credit — Underwriting Deterioration and the Medallia Takeover Case Study. Private lenders are rapidly losing appetite for abstract recurring revenue models threatened by AI disruption, preferring to fight over low-rated but asset-rich borrowers like American Rock Salt AI and SaaS Concentration Risk in Private Credit — Underwriting Deterioration and the Medallia Takeover Case Study
. This shift shows that when credit conditions tighten, the safety of hard collateral easily eclipses the growth narrative of enterprise software.
What to watch: Watch whether tech-focused private equity sponsors are forced to inject fresh equity to save their portfolio companies as lenders demand heavy concessions to refinance upcoming maturities.
The Deferral Game: "Bad PIK" and Shadow Defaults
Credit stress is increasingly being masked by "soft" restructurings and payment-in-kind (PIK) amendments as lenders work to preserve par marks and delay formal bankruptcies.
"One amendment is fine — that’s just private credit working as designed. But the fourth amendment on the same name is not a bridge to recovery, it’s deferral... PIK negotiated upfront for a growth company is fine. A cash-pay loan flipped to PIK mid-life is the tell…" — Fitch Reports Record 6.1% Private Credit Default Rate in July 2026 as Stress Shifts to Maturity Extensions and Shadow Defaults
While the official private credit default rate hit a record 6.1% in July 2026, the real stress lies in "shadow defaults" where cash-pay loans are amended to PIK interest Fitch Reports Record 6.1% Private Credit Default Rate in July 2026 as Stress Shifts to Maturity Extensions and Shadow Defaults. This practice helps lenders avoid immediate loss recognition, but it risks inflating debt balloons that will eventually burst when these extended facilities mature.
What to watch: Watch if the rise of "Bad PIK" loans—which hit 6.2% of all private loans in Q2 2026—begins to trigger regulatory intervention as the quality of interest income deteriorates Fitch Reports Record 6.1% Private Credit Default Rate in July 2026 as Stress Shifts to Maturity Extensions and Shadow Defaults.
The Liquidity Squeeze and Secondary Market Offloads
Retail-facing evergreen funds and BDCs are turning to the secondary market to execute massive balance-sheet rescues as redemption pressures mount.
"meaningful increase in private loans being traded before maturity" — Retail Evergreen Funds Gate Redemptions as Blackstone, Ares, and Apollo Hit Withdrawal Caps in Synchronized Q2 2026 Squeeze
(via Lincoln International)
This trend is epitomized by BlackRock TCP Capital Corp. (TCPC) offloading a massive $523 million portfolio to Pantheon to slash its leverage Retail Evergreen Funds Gate Redemptions as Blackstone, Ares, and Apollo Hit Withdrawal Caps in Synchronized Q2 2026 Squeeze. These secondary transactions provide much-needed liquidity, but they force BDCs to accept steep hits to their Net Asset Value, exposing the underlying stress of legacy portfolios.
What to watch: Watch if more public and private BDCs are forced to evaluate strategic mergers or aggressive asset sales as redemption caps remain under pressure.
What surprised us
- The scale of the Medallia equity wipeout: Thoma Bravo and its co-investors lost their entire $5+ billion equity investment in Medallia Inc., marking one of the largest private equity failures since 2008 AI and SaaS Concentration Risk in Private Credit — Underwriting Deterioration and the Medallia Takeover Case Study
- The sheer volume of lender foreclosures: Direct lenders foreclosed on $22.3 billion of principal in the first half of 2026 alone, practically matching the total for the entirety of 2025 Retail Evergreen Funds Gate Redemptions as Blackstone, Ares, and Apollo Hit Withdrawal Caps in Synchronized Q2 2026 Squeeze
- The massive discount on BlackRock TCPC's rescue: To secure liquidity, BlackRock TCPC accepted a 10.4% drop in Net Asset Value to transfer a massive chunk of its portfolio to Pantheon Retail Evergreen Funds Gate Redemptions as Blackstone, Ares, and Apollo Hit Withdrawal Caps in Synchronized Q2 2026 Squeeze
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