July 21: A substantial liquidity shift is underway in the global private markets as private equity fund managers are increasingly turning to PIK (payment-in-kind) structures to manage cash flows, which in turn is raising challenging questions around transparency and risk management, according to new research* from Ocorian, a leading U.S. and global asset services provider.
The study of private equity fund managers in in the U.S. and across Europe, managing $3.511 trillion, found that almost nine out of 10 (86%) expect PIK prevalence within their private credit exposure to grow over the next two years. Of these, 4% say their use will increase dramatically, and 82% say it will increase slightly. The remaining 14% believe PIK prevalence will remain unchanged.
Search for flexibility in a challenging market
PIK structures allow borrowers to issue additional debt or equity to lenders rather than servicing interest obligations with immediate cash payments. While this provides breathing room for portfolio companies, it simultaneously signals underlying vulnerabilities in corporate balance sheets.
Worryingly, nine in 10 (90%) of those surveyed agree that there is a growing risk of PIK usage masking true borrower distress, with 16% of these strongly agreeing that deferring hard cash obligations makes it difficult to distinguish between proactive capital management and severe liquidity struggles.
Anatoly Sorin, UK Head of Loan Agency and Bond Trustee Services at Ocorian, said: “Our research reveals an overwhelming consensus that PIK structures are on the rise, and private equity fund managers are doing everything they can to support portfolio companies through a prolonged period of higher financing costs. However, this flexibility does come with a warning label.”
As PIK adoption grows, capability gaps emerge
In addition to this challenge, Ocorian’s study also exposes operational and technological vulnerabilities connected to the growing adoption of PIK structures. As PIK interest compounds, it directly alters preferred return hurdles, the distribution waterfall, and the complex calculation of realised versus unrealised gains – the metric that ultimately dictates performance fees, or ‘carried interest’.
Only 17% of firms surveyed report having robust, automated systems capable of fully accounting for PIK compounding within the waterfall modelling. Just under a third (32%) admit they rely entirely on external providers, such as fund administrators, to handle the structural complexity. Just over a third (39%) acknowledge they can model PIK but require significant manual adjustment, while 10% say this remains a gap in their current capabilities. A further 2% state that PIK is not yet material enough in their current portfolio to warrant a dedicated system.
Anatoly Sorin, UK Head of Loan Agency and Bond Trustee Services at Ocorian, added: “With PIK structures becoming more prevalent, firms’ operational and technological capabilities must keep pace, either in-house or by outsourcing to expert third-party fund administrators with the skills and experience required to ensure that waterfall and carry calculations remain accurate, consistent and transparent.”
Abi Reilly, Partner, Regulatory & Compliance at Ocorian said: “As firms navigate the operational demands of PIK structures, governance and oversight need to remain front of mind. It is important that firms are able to evidence how these structures are monitored, modelled and reported on, particularly where complexity increases and third-party support is involved.”