Direct Lenders Increase Focus on Valuations After Negative BDC Headlines; PIK Levels Remain Elevated

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Direct Lending Stress Monitor Q1 2026 (Excel)
European BDC PIK Loans
PCDO Dashboard

European direct lenders have been busy fielding questions from concerned investors in the first quarter of 2026.

After the AI-driven selloff of software names in the wider credit markets, every fund manager was tasked with giving a detailed analysis of the exposure of their own portfolio to AI disruption. Software investments make up around 30% of investment cost and fair value in business development companies, or BDCs, according to Octus proprietary analysis. Given many of the BDC managers hold European loans and also manage European limited partnership funds, it is fair to assume that European private credit’s exposure is at a similar level, particularly when the software and services sector made up 37.3% of new deal flow in 2025.

The next set of questions from LPs was related to but distinct from the first. As investors started to panic about software, some of those with private credit exposure began assessing strategies to mitigate their positions. This led to unprecedented redemption requests for managers that offer liquidity via BDCs such as Ares, Apollo, BlackRock, Blackstone, Blue Owl, KKR, Oaktree and many others, largely from investors skeptical about the valuations reported by the managers.

The knock-on impact on European direct lenders has been increased scrutiny on valuations shown to LPs. Nick Baldwin, head of the European private valuations group at Lincoln International says they’ve been seeing an increase in private credit managers pursuing best practices in portfolio valuation that includes validation by a third party.

However, Baldwin says that so far there’s been little impact on the earnings of software companies. “This isn’t new for private credit originators – they have been looking at AI risk in their investment committees for some time,” he said, however he did add that, “the speed this disruption will happen at is a big unknown.”

More broadly though, the percentage of loans that have utilized PIK toggle remain elevated and the cohort of private credit-backed issuers with less than 10% covenant headroom also remains high at around 14%.

You can see a list of European loans held in BDC vehicles that are PIKing some portion of their interest as of their most recent reporting date HERE. The presence of PIK does not universally indicate a company is in distress. Moreover, not all of these loans are standard direct lending deals, as some managers hold syndicated term loan Bs in their portfolios.

Many of the software companies listed may be utilizing their PIK toggles for benign reasons, but for others it could be the first sign of stress.

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