Payment-in-kind is one of the most scrutinised features in private credit today – and one of the most misunderstood. The labels we reach for don’t always tell the full story.

The market has settled on a familiar shorthand for thinking about payment-in-kind (PIK). “Good PIK” is the PIK agreed at entry, a deliberately structured feature of the deal, priced and protected from day one. “Bad PIK” is the PIK that arrives later, typically through an amendment, when a borrower can no longer service cash interest and the lender agrees to capitalise it instead.

It is language you will hear across the industry, and as a first cut it holds up: PIK a lender chose to underwrite is generally healthier than PIK a lender was forced into. One mechanical distinction is worth drawing up front: structured PIK capitalises interest by design from day one, while a PIK toggle is an option to switch from cash to PIK on defined terms – and either form can be good or bad, so what follows applies to both.

But the shorthand misses something.

Anchoring the distinction on when the PIK was agreed assumes that origin determines outcome: that good beginnings produce good endings. They do not always, and that gap opens up a category the two-way split has no name for: PIK that was agreed at the onset, and so looks like good PIK, but was never really value-covered. Call it “Fake Good PIK”.

A PIK feature’s origin tells you how it started; it says nothing about whether the position stays covered, or whether value is slowly migrating from lender to borrower over the life of the hold. So, we are really assessing three PIKs, not two – good, bad, and fake good – and two positions can sit under the same “good” label yet end up in opposite places. Two scenarios a direct lender might face, and approach differently, show why.

Scenario one – the disciplined originator 

THE SETUP

A direct lender originates a transaction with a PIK toggle built in from the outset. Crucially, the feature comes with adequate protections: the toggle can only be exercised in defined circumstances, PIK usage is capped (to a % of margin, ie there is a minimum cash pay) and time-limited in the documentation, and, importantly, any PIK is charged at a premium to the cash margin. PIK is expensive by design, which keeps the borrower honest about when they use it.

The company performs strongly throughout the hold. Some way into the investment, management identifies an attractive bolt-on acquisition and comes to us with a plan: they intend to toggle to PIK for a predefined period, at the agreed premium, to preserve cash while they integrate the target and capture synergies. Then they expect to return to cash pay.

We are comfortable with this. Our position remains well value-covered, the PIK is limited in both size, scope and duration by the documentation we negotiated, and we are being paid a premium for the flexibility we are extending. This is a healthy business using a tool we deliberately built into the structure to fund growth on sensible terms, not a borrower in distress reaching for oxygen. In due course, the company delivers on the integration, switches back to fully cash pay, and the position resolves itself cleanly.

VERDICT

Good PIK – and it earns the label. Agreed at entry, tightly protected, priced at a premium, used briefly by a performing business, and fully value-covered throughout. The structure did exactly what it was designed to do.

Scenario two – the stretch that never grew into itself  

THE SETUP

A lender originates a deal that requires a PIK component from day one. The PIK is not funding a specific, time-boxed use of cash; the borrower simply wants to stretch leverage without generating the cash to service it today. The thesis rests on future growth: the company expects to grow into the capital structure, and the PIK is meant to bridge the gap until it does.

On the surface, this is “good PIK” by the standard definition – it was agreed at the onset, not bolted on later through an amendment. But the label flatters it. The growth never materialises. Rather than being a temporary feature that switches off once cash flow arrives, the PIK simply keeps running.

The balance compounds, quarter after quarter, and the PIK creeps up. And it makes little difference here whether the PIK was structured in from day one or a toggle the borrower had to trigger once the growth case slipped: the mechanism differs, but the outcome – a compounding balance that cash flow never catches up with – is the same.

The problem isn’t the mechanism itself, but what it conceals. Because cash is never generated, the lender’s return becomes increasingly back-ended: more and more of the expected value sits in a growing accrued balance that only gets realised at exit or refinancing, and only if the enterprise value is there to support it.

Every quarter of missed growth widens the gap between the notional return on paper and the cash the position has actually produced. A feature designed to bridge to growth has instead become a way of deferring the recognition that growth is not coming.

VERDICT

Bad PIK – despite ticking the “agreed at entry” box. It started clean. That didn’t save it: value has shifted into an accruing balance whose recovery depends on a growth story that never delivered.

Why the labels only get you so far

Set the two side by side.

Scenario one was agreed at entry and is genuinely positive. Scenario two was also agreed at entry, and is not.

The “good PIK / bad PIK” framing, anchored on when the PIK was agreed, misses the questions that actually matter: Is the position value-covered? Is the PIK time-limited and capped, or open-ended? Is it being paid at a premium that keeps the borrower disciplined? And is it funding a specific, self-liquidating need, or substituting for cash the business was always going to struggle to produce?

Categorising PIK is a helpful exercise, and we do it. But the labels are a starting point, not a substitute for judgement. The characteristics of each situation – coverage, protections, pricing, purpose and trajectory – are what determine whether PIK is working for the lender or against it.

At Hayfin, we address PIK usage carefully and try to get ahead of it where it matters most: at origination.

Underwriting discipline is key, we assess fundamental cashflow generation and look critically at the sustainability of capital structures taking into account potential PIK accretion. The right protections – caps, minimum cash pay, time limits, premium pricing and clearly defined toggle conditions – are far easier to secure when you are structuring a deal than to retrofit once a position is stressed. Done well, PIK is not something to be feared. It can be an effective tool to optimise performance in situations where our debt position is value-covered, allowing good businesses to fund growth without over-burdening cash flow.

So, good, bad, or fake good PIK?

As is so often the case in private credit, the honest answer is: it depends – on the structure you negotiated, the coverage you hold, and the discipline you bring to both. The label on the tin is the least interesting part.

Hayfin today announces the successful close of Hayfin Direct Lending Fund V (“DLF V”), having attracted capital in excess of €15 billion, significantly exceeding its target for the fundraise. The fundraise comprises the commingled Hayfin Direct Lending Fund V, which has reached a final close, together with related investment vehicles. At the time of the close, DLF V had already deployed more than 50% of commitments across over 35 companies. 

Through its Direct Lending strategy, Hayfin sources, structures and invests in performing senior‑secured loans to primarily European middle‑market and upper‑middle‑market businesses, with an emphasis on downside protection and robust cash flow generation or asset coverage. The vast majority of these loans are originated through an extensive relationship-based primary sourcing network spanning 13 offices and dedicated sector‑specialist teams. This broad-based origination model has allowed Hayfin to build a diverse portfolio of loans to a wide range of cash‑generative businesses, with minimal exposure to software credits deemed most susceptible to AI disruption. Hayfin invested a record €7.1 billion into Direct Lending transactions in the last twelve months, bringing total strategy deployment to over €38 billion across more than 350 investments since the firm’s inception. 

The fundraise attracted capital commitments exclusively from a global institutional investor base, comprising public and private pension funds, financial institutions, insurance companies, sovereign wealth funds, funds of funds, endowments, consultants and family offices. Recent strains within semi-liquid US private credit funds for retail investors have accelerated LP demand for conservative fund structures, in line with Hayfin’s approach of securing locked-up capital in closed-ended drawdown and institutional evergreen vehicles. This helped Hayfin to achieve the most significant milestone yet for its flagship private credit strategy with the successful close of Direct Lending Fund V, more than doubling the amount raised for Direct Lending Fund IV, which closed in August 2023 with over €6bn in total commitments.  

The DLF V fundraise also includes the successful close of a rated note feeder which contributed approximately $600 million of total investable capital. The structure, advised on by Proskauer as Legal Counsel, provides insurers with capital-efficient access to Hayfin’s European Direct Lending strategy, reflecting the firm’s commitment to broadening access to its private credit platform across a diverse range of institutional investor types. 

Mark Tognolini, Co-Chief Executive Officer and Co‑Founder of Hayfin, commented: “We are very pleased with the successful close of Direct Lending Fund V and grateful for the strong support from both new and long‑standing investors. At a time when parts of the private credit market are experiencing heightened volatility, this fundraise reflects confidence in our disciplined underwriting, our highly specialised team, our conservative approach to fund structuring and our differentiated origination model, which has been built to perform consistently across market cycles. 

“In recent months, longstanding differences between the US and European private credit markets have become even more pronounced, with European lenders continuing to benefit from greater market fragmentation, continued bank retrenchment and a predominantly institutional capital base. Against this backdrop, we are well placed to take further market share and support high‑quality European businesses with flexible financing solutions – as we have consistently done in other periods of volatility – while preserving our focus on capital preservation and downside protection.” 

Hayfin was advised on the fundraise by Macfarlanes. 

Since it was founded in 2009, Hayfin has invested over €55bn of capital across more than 500 portfolio companies via its private credit strategies. 

Hayfin is pleased to announce that it is the lead lender providing the debt financing to support the acquisition of international events company, Easyfairs, by Cobepa, Inflexion and the existing management team.

Easyfairs is one of the world’s top ten events companies, welcoming more than one million visitors annually and 23,000 exhibitors to its events. Easyfairs organises 110 event titles in 12 countries across 12 industry verticals. It also manages eight event venues in Belgium, the Netherlands and Sweden.

The transaction will enable Easyfairs to drive faster organic growth through new event launches and geo-cloning of existing events, extend its geographic and sector footprint, enhance its position as a sector frontrunner in big data and artificial intelligence technologies, and unlock further strategic M&A opportunities.

Sebastiaan Tito, Principal, Direct Lending at Hayfin, commented: “Our investment into the acquisition of Easyfairs demonstrates Hayfin’s extensive experience in the events sector as well as our ability to successfully position ourselves in attractive market segments and execute financing agreements of significant scale to provide speed and certainty to our partners. We are excited to partner with the shareholders in supporting Easyfairs, a business with great potential, supported by a strong pipeline of organic and inorganic growth opportunities.”

Disclosure
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