The Rise of Non-Cash Pay Capital Structures
In an environment where interest rates remain elevated and exit timelines have extended, private equity sponsors are seeking new ways to balance liquidity needs against operational realities. As a result, Configure has observed an increase in non-cash pay capital structures. Payment-in-kind (PIK) instruments, holdco PIK structures, and preferred equity solutions have increased in prominence.
These structures share a common thread: they allow sponsors to raise capital while preserving cash at the operating company level. Yet, the mechanics and long-term consequences of each differ substantially. For private equity sponsors, understanding when, where, and how to deploy these tools can make the difference between enabling growth and creating unnecessary capital structure constraints.
The Mechanics of PIK Instruments
At its core, a PIK instrument is one in which interest is paid not in cash, but through the accrual of additional principal or securities ‚ or paid-in-kind. Instead of an immediate outflow of cash debt service, the obligation grows over time, typically compounding until maturity or a liquidity event.
Traditional PIK Notes are structured as subordinated debt. Lenders receive compensation in the form of added principal, which results in a larger balloon payment at maturity. PIK toggle notes offer the issuer flexibility to switch between cash-pay interest and PIK interest, often at a stepped-up rate if toggled to PIK (the “PIK premium”). Holdco PIK Notes are issued at the holding company level, structurally subordinated to operating company debt. They rely on upstream distributions or exit proceeds for repayment.
PIK financing at the holding company level can also provide incremental capital for bolt-on acquisitions without straining the senior debt package.
Lastly, preferred equity is a hybrid solution. While not technically debt, preferred equity carries contractual return features (often with a PIK element), sits senior to common equity, and may come with governance rights or downside protections.
Importantly, some PIK preferred instruments are structured to convert into common equity at maturity or upon a liquidity event. This means that what starts as a compounding claim on value can ultimately become dilutive to common shareholders, making it critical for investors to model both the cash flow impact of PIK accruals and their eventual effect on ownership.
Each of these instruments occupies a different position in the capital stack. While traditional debt is serviced from the operating company’s cash flows, PIK and preferred equity rely more heavily on future events — such as exits, refinancings, or recapitalizations — for repayment.
Why Sponsors Use PIK Financing
The renewed interest in PIK structures is not surprising. The key attraction is liquidity flexibility. Common use cases include liquidity relief, where operating companies face constrained cash flows; a PIK instrument avoids burdening the business with current interest expense. Sponsors may use holdco PIK or preferred equity for dividend recapitalizations to extract liquidity without increasing leverage at the portfolio company.
When structured appropriately, PIK and preferred equity offer several clear advantages, including cash preservation.
PIK financing at the holding company level can also provide incremental capital for bolt-on acquisitions without straining the senior debt package. Additionally, as exit timelines lengthen, PIK instruments bridge capital needs, whether for growth or liquidity management. Lastly, at times, sponsors employ PIK or preferred equity at the fund or GP level to meet capital commitments, fund continuation vehicles, or support cross-portfolio initiatives.
In each scenario, the common denominator is flexibility: the ability to preserve cash today while deferring repayment obligations to a later, more favorable moment in the future.
PIK vs. Preferred Equity: Key Differences
Although both PIK and preferred equity preserve cash, the two structures differ meaningfully in economics, treatment, and implications, as outlined here:
Risk/Return Profiles: PIK notes are debt instruments. They carry a contractual obligation to repay, albeit one that is subordinated. Preferred equity, by contrast, sits below debt in the capital stack and typically commands a higher expected return to compensate for its risk.
Treatment by Ratings and Lenders: PIK instruments are often viewed as leverage, whereas preferred equity may receive partial equity credit depending on terms. This distinction can influence both the company’s reported leverage metrics and the perception of other lenders.
Tax and Accounting: Interest on PIK notes may be deductible, subject to limitations. Preferred equity returns, however, are not interest expense and can affect reported earnings differently.
Governance Rights: Preferred equity investors often negotiate for consent rights, board seats, or enhanced reporting privileges. PIK noteholders may have fewer governance levers, though covenant protections are notable.
Investor Base: PIK notes often attract private credit funds, hedge funds, or specialty finance vehicles. Preferred equity is more commonly provided by credit opportunity funds, insurance capital, and, in some cases, co-investing LPs.
For sponsors, the decision between the two often hinges on balancing cost, flexibility, and control.
Market Trends and Applications
The current macro backdrop has made PIK financing especially relevant. With higher-for-longer rates, cash-pay debt service can be an outsized burden, making preserving cash through PIK accruals an attractive option. Extended hold periods mean M&A markets are driving sponsors to hold assets longer, increasing the likelihood of mid-hold liquidity needs. Alongside continuation vehicles and NAV-based strategies, sponsors are turning to PIK and preferred equity for creative financing solutions.
Sponsors must therefore view these instruments not as a cure-all, but as part of a holistic capital strategy.
Examples of such applications include a sponsor funding a bolt-on acquisition through holdco PIK debt to avoid renegotiating senior facilities, a dividend recap structured through preferred equity, which provides liquidity to investors while maintaining operating flexibility, or a GP financing its commitment to a continuation vehicle using a PIK-preferred instrument provided by a specialty lender. In each case, the instruments serve as liquidity valves — sometimes defensive, sometimes offensive.
Benefits for Private Equity Sponsors
When structured appropriately, PIK and preferred equity offer several clear advantages, including cash preservation, which is critical in businesses with tight liquidity or high reinvestment needs; financing flexibility, which provides capital without the immediate burden of servicing cash-pay debt; and a broader investor base, which brings in capital providers beyond traditional banks, diversifying funding relationships.
Additionally, these instruments can be tailored — toggle features, step-up pricing, equity kickers — to align with sponsor objectives. There is also strategic optionality, as investors can enable dividends, add-ons, or growth initiatives without destabilizing the operating company’s balance sheet. For sponsors, these features can create meaningful breathing room in a volatile environment.
Risks and Tradeoffs
Yet the same features that make PIK attractive also introduce risks. Sponsors must weigh:
Compounding effect: PIK accruals can snowball, leading to a significant repayment obligation at maturity.
Cost of capital: PIK and preferred equity are among the most expensive forms of capital, often with double-digit yields.
Structural subordination: Holdco placement or equity ranking increases repayment risk, which investors price accordingly.
Governance concessions: Preferred equity, in particular, can dilute sponsor control through consent rights or board seats.
Exit complexity: Preferred equity can create misaligned incentives or disputes in distribution waterfalls, potentially complicating the dynamics between sponsors and LPs.
Sponsors must therefore view these instruments not as a cure-all, but as part of a holistic capital strategy.
Looking Ahead: The Role of PIK and Preferred Equity
Looking forward, PIK and preferred equity are likely to remain integral components of private equity financing playbooks. Several themes are shaping their trajectory:
Expect more usage in GP- and LP-level financings, including continuation vehicles and NAV-based strategies.
Structures combining delayed draw features, toggles, and equity participation will proliferate.
Direct lenders, opportunistic credit funds, and insurance-backed vehicles are all competing aggressively for these mandates.
As long as base rates remain elevated, sponsors will continue to value the cash-preserving features of PIK and preferred equity.
Ultimately, these instruments represent a balancing act: immediate flexibility traded for long-term cost and complexity. Sponsors who use them judiciously — aligned with deal strategy and exit visibility — can extract significant value without overburdening portfolio companies.
About Configure Partners
Configure Partners is a credit-oriented investment bank specializing in debt placement. The firm provides the highest level of client service and execution to middle-market private equity sponsors in acquisition finance, refinancing, and dividend recapitalization transactions. Configure is one of the largest firms dedicated to debt advisory. We’ve developed our processes and systems to ensure execution across all types of financing transactions. Unlike other debt placement groups, we don’t treat debt advisory as a secondary service offering to M&A — debt placement is our entire business.
Importantly, we consider ourselves an extension of our clients in the market, and we treat lenders accordingly. The cumulative effect of this approach is particularly powerful in a more difficult financing environment where debt capital is less “abundant.” The results of the Configure methodology speak for themselves, with over 80% of our revenue coming from a repeat source of business.
If the above article has sparked a question or thought concerning PIK financing structures, please feel free to reach out to any of our Configure team members or visit our website at www.configurepartners.com.
About the Authors
Mark Birkett
Mark joined Configure in 2025 as our first banker in Chicago, bringing over two decades of experience supporting private equity firms and middle-market borrowers across a range of debt products, including those supporting acquisitions, growth, recapitalizations, and refinancings.
During his career, Mark has underwritten and advised clients in structuring and executing more than $6 billion of financings comprising senior debt, subordinated debt, structured capital, and non-control equity.
Before joining Configure, Mark was a Senior Managing Director at Hilco Corporate Finance. Prior to joining Hilco Corporate Finance, Mark was a Managing Director in
the Leveraged Finance Group at William Blair. Previously, he served as Partner and Managing Director at Livingstone Partners, a lower middle-market investment bank. He was also an Underwriter at GE Antares Capital.
Mark earned his MBA from the Ross School of Business at the University of Michigan and his B.S.B.A. in Finance from Villanova University.
Joseph Weissglass
Joseph has focused his career on providing advisory services to middle-market companies regarding debt advisory, liability management, and restructuring engagements.
Joseph joined Configure Partners from the Middle-Market Special Situations practice at Guggenheim Securities, where he served as Vice President. Prior to joining Guggenheim, he was part of the Global Finance and Restructuring Group at Barclays Capital in New York.
Joseph graduated with a B.S. in Construction Science and Management from Clemson University and with an MBA from the University of North Carolina Kenan-Flagler Business School. He is a FINRA General Securities Representative (Series 24, 63, 79) and holds the Certified Insolvency and Restructuring Advisor (CIRA) and the Certification in Distressed Business Valuation (CDBV) designations.
Joseph remains active as a thought leader in the private debt space. His insights and commentary on market trends have been featured in industry publications, including Bloomberg, Private Equity Professionals, Mergers & Acquisitions, Private Debt Investors, PitchBook, The Deal, and LSEG Loan Connector.