Private Debt News Weekly Issue #48: Hedge Funds Bet Against Private Credit as PIK Usage Surges and Valuations Strain
Shorts pile into direct lenders, cash flows disappear, and retail money keeps flowing as the market tiptoes toward a reckoning.
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Private credit’s glow is fading fast.
This week, hedge funds escalated their bets against the sector, shorting listed lenders like Apollo and Ares while PIK usage balloons, valuations strain, and the secondaries market explodes with desperate LPs seeking exits.
Behind the scenes, some of the industry’s biggest names—Apollo, Oaktree, Sixth Street—are pumping the brakes, hoarding dry powder for what they see as a coming credit reset. Meanwhile, retail flows keep rolling in, even as defaults, downgrades, and mark-to-model fiction begin to surface.
From a $5.5 billion mega-deal to AI-fueled debt packages, here’s what’s really happening beneath the surface of the $1.7 trillion private credit market.
Key Market Trends
1. Hedge Funds Bet Big Against Private Credit
The hedge fund community is officially circling private credit.
Short sellers have made $1.7 billion in paper profits this year by betting against publicly listed private credit managers like Apollo, Ares, and Blue Owl.
Their thesis: private lenders are loaded with over-levered borrowers, opaque valuations, and unrealized credit stress.
Valuation skepticism is spreading. Just 40% of direct lenders reporting to the SEC use third-party loan appraisals.
Why it matters: For the first time, the market is treating direct lenders as fragile—not defensive.
2. PIK Income Surges to Dangerous Levels
Payment-in-kind (PIK) loans are starting to dominate fund income statements.
At the end of Q4, over 25% of net investment income at BDCs came from PIK loans.
EY reports 75% of PIK loans were still marked at 95+ cents on the dollar—despite limited cash interest being received.
Funds are letting borrowers flip cash pay to PIK mid-cycle to avoid defaults.
Translation: Credit portfolios are becoming increasingly illiquid, unmonetized, and mispriced.
3. Big Credit Managers Sound the Alarm
Even the bulls are blinking.
Apollo CEO Marc Rowan says his firm is “waiting for the fat pitch,” adding: “We’re willing to sit things out.”
Oaktree's Robert O’Leary is preparing for “macro dislocation” and warns double-digit default rates are possible in private credit.
Some portfolios are already trading in the 50–70 cent range on the secondary market.
The new playbook: Keep cash, lend only when spreads widen, and don’t chase bad paper.
4. Private Credit’s Retail Push Rolls On—Even as Risks Mount
Retail capital continues flowing into private credit—while insiders quietly express concern.
T. Rowe Price, Pimco, and Blackstone are all building new products for retirement portfolios and high-net-worth clients.
Apollo’s S3 fund offers 3% loyalty bonuses and no performance fees to lock in long-term retail flows.
Pimco’s new semi-liquid fund in Europe will focus on asset-based lending, CRE debt, and hard-asset loans.
The catch: Daily liquidity and long-dated, mark-to-model loans don’t mix.
5. AI Infrastructure Debt Is the Next Frontier—Or the Next Bubble
The AI arms race is producing enormous capital needs.
Carlyle estimates $1.8 trillion will be required for AI infrastructure by 2030.
Apollo, KKR, Ares, and SoftBank are already backing multi-billion dollar data center projects, some tied to chip collateral or cloud platform leases.
Nscale, a startup less than a year old, is raising $2.7 billion, including $1.8 billion in private credit, with a ByteDance partnership pending.
Private credit wants in—but underwriting discipline will make or break this push.
Notable Deals & Strategic Moves
Ares Management is leading a $5.5 billion package for Clearlake’s $7.7 billion acquisition of Dun & Bradstreet, with Morgan Stanley syndicating part of the deal.
Mubadala committed $1 billion to Fortress Investment Group, backing ABL and private credit expansion.
Apera Asset Management closed €2.9 billion for its latest lower mid-market fund, more than double its prior raise.
New Mexico’s sovereign fund allocated $150 million each to Evolution Credit and an Ares sports/media fund, with plans to double their credit allocation over the next five years.
Earnings Season & Macro Volatility
Sixth Street warns BDC ROEs will fall from 6.7% to 5.2%, citing reduced loan spreads and tariff impact.
Apollo’s credit business saw double-digit fee growth—but PE exits remain stalled.
Clearlake is adding equity into the Dun & Bradstreet deal, recognizing rising leverage and liquidity concerns.
Forward Outlook
Q2 Will Be the Reckoning for Marks
As PIK grows and spreads widen, funds will be forced to address stale valuations.
BDCs will get hit first. Private funds will follow.
Asset-Based Credit Will Keep Expanding
From mortgages to data centers, investors are chasing contracted cash flow over EBITDA.
New funds (Pimco, Apera, Evolution) reflect that pivot.
Secondaries and NAV Financing Are Going Mainstream
Expect more LPs to tap NAV loans or exit via secondaries.
Funds will need liquidity—and fast.
Retail Inflows Will Paper Over Short-Term Problems
Flashy new fund launches will mask deep internal stress.
The mismatch between redemption timelines and actual liquidity will become more obvious.
AI Infrastructure Will Drive Deal Flow and Risk
There’s real opportunity—but also a lot of money chasing unproven credits.
Underwriting standards will define who survives the wave.
Final Takeaway
Private credit is no longer a story of exponential growth—it’s becoming a story of survival. The cracks in portfolios are widening. PIK is the new default. And while retail flows and mega-deals grab headlines, the real signal is in what insiders are doing: waiting, hoarding cash, and bracing for pain.
The reckoning may not be here yet—but it’s closer than this market wants to admit.
Stay sharp. And stay tuned with Private Debt News Weekly—your inside track on deals, dislocations, and discipline in the world’s most opaque asset class.
When you short Apollo’s public equity, you’re effectively shorting the entire institution—not just their credit arm. Thoughts? So the inflows of shorts may not be directed at PC