Thoma Bravo's $5.1bn equity wipeout in Medallia reveals cracks in private credit's business model. The customer experience software company's debt restructuring shows how Business Development Companies loaded up on risky loans while collecting fees on both cash and payment-in-kind interest payments.

About $1.8bn of debt funded the 2021 acquisition, with Blackstone's BCRED and Secured Lending Fund snapping up roughly $825mn combined. Initial concentration hit 5.2% of BCRED's net assets, falling to 3.6% by mid-2022 as inflows diluted positions.

Loan terms shifted dramatically from Libor plus 6.75% PIK to 2.5% cash spread with 4% PIK by late 2023. Managers marked down fair values from mid-2024, yet BDC fee structures continued rewarding them on gross income regardless of performance.

The arrangement creates perverse incentives where managers profit from growing non-performing debt. BDCs collect base fees on assets plus incentive fees on all income - cash and PIK alike - even as loan values deteriorate.