On a PIK instrument, the coupon is not paid: it is capitalised and itself bears interest. The fund's exposure rises accordingly, with no cash flow. Beyond the valuation of the receivable — a yield analysis reflecting credit quality, coupon and term, and, for capitalised interest, the present value of the amount expected on redemption — the question that recurs in review is its treatment in the metrics: what belongs to cost, to NAV and to IRR cash flows.
Calculation convention
PIK interest for the period = opening principal × PIK rate × period length; Jolv convention: closing cost = opening cost + capitalised PIK interest
Jolv convention, which departs from the ILPA definitions (where PIK is excluded from invested capital): PIK increases invested cost and records no IRR cash flow; a repayment is cash received and leaves historical cost unchanged.
Worked example (fictional)
€10m ticket, 10.0% PIK capitalised annually, no repayment over three years.
| Cost after 1 year | €11.00m |
|---|---|
| Cost after 2 years | €12.10m |
| Cost after 3 years | €13.31m |
| IRR cash flows over the period | 0 |
If NAV includes the €3.31m of capitalised interest while the denominator stays at the original ticket, like invested capital under the ILPA definitions, the multiple gains 0.33×; under the Jolv convention, cost and NAV rise together and the multiple is not mechanically lifted. If that interest is treated as cash flows, IRR records performance the fund has not collected.
Review points
- Capitalised interest reported as positive IRR cash flows.
- Book cost held at the original ticket although exposure has increased.
- A cash/PIK option at the borrower's discretion valued on a single scenario.
In Jolv
In the private debt module, Jolv increases cost for PIK, leaves cost unchanged for a repayment and records no IRR cash flow for capitalised interest.
Feature — Private debt valuation
Further reading — PIK interest and IRR: why capitalized interest is never a cash flow