AI’s Shadow Over Private Credit: Why Big Names Are Feeling the Heat
The stock market delivered a stark warning this week: the booming world of private credit isn’t immune to the disruptive force of artificial intelligence. Shares of major players like Blue Owl, TPG, Ares Management, KKR, Apollo Global, and even BlackRock took significant hits, fueled by fears that their substantial holdings in private credit are exposed to industries facing upheaval from AI – particularly software.
The Software Sell-Off and Its Ripple Effect
Publicly traded software companies have been under pressure all year. Investors are increasingly concerned that AI tools, like Anthropic’s Claude Code, will allow businesses to build their own software, diminishing the need for expensive, off-the-shelf solutions. This has already manifested in a 20% drop year-to-date for the iShares Software ETF (IGV), with another 5% decline on Tuesday alone. But the impact isn’t limited to public markets.
Private credit firms, which lend directly to companies, often have significant exposure to the software sector. According to UBS analysts, between 25% and 35% of the entire private credit market could be at risk. That’s a considerably higher concentration than in the high-yield corporate bond market, where technology exposure is around 8% (using the iShares iBoxx High Yield Corporate Bond ETF (HYG) as a benchmark).
Two Ways AI Impacts Private Credit Firms
The pain for these firms is two-fold. First, their private equity arms could see lower returns if software companies are revalued downwards, impacting carried interest on tech-focused investments. Second, and more immediately concerning, is the potential for defaults and redemptions within their private credit portfolios.
UBS estimates that U.S. private credit default rates could jump to 13% if AI triggers widespread disruption, compared to just 4% for high-yield bonds. This isn’t just about individual company failures; it’s about a systemic shift in the competitive landscape.
Did you know? The current situation is different from the “cockroaches” Jamie Dimon warned about last year, which were largely isolated incidents of fraud. This software rerating represents a broader, sector-wide challenge for private credit.
Beyond Software: Where Else Could AI Pose a Threat?
While software is the initial focal point, the potential for AI disruption extends far beyond. Any industry reliant on repetitive tasks or data analysis is vulnerable. This includes sectors like customer service, data entry, and even some areas of financial analysis. Private credit firms with diversified portfolios will be better positioned to weather the storm, but even they aren’t entirely safe.
Consider the implications for business process outsourcing (BPO) companies, often funded by private credit. AI-powered automation could significantly reduce the need for these services, leading to revenue declines and potential defaults. Similarly, companies providing data labeling and annotation services – crucial for training AI models – could face margin pressure as AI itself becomes more efficient at these tasks.
What Does This Mean for Investors?
The recent market reaction signals a growing awareness of these risks. Investors are likely to become more discerning, demanding higher risk premiums for private credit investments, particularly those with significant exposure to vulnerable sectors. This could lead to tighter lending standards and a slowdown in private credit deployment.
However, it’s not all doom and gloom. AI also presents opportunities. Companies that successfully leverage AI to improve efficiency, develop new products, or gain a competitive edge will be well-positioned for growth. Private credit firms that can identify and finance these “AI winners” could generate substantial returns.
FAQ: AI and Private Credit
- What is private credit? Private credit involves lending directly to companies, bypassing traditional banks.
- Why is software particularly vulnerable to AI? AI tools can automate software development, reducing the need for traditional software purchases.
- Could this lead to a wider financial crisis? While a systemic crisis is unlikely, increased defaults in private credit could impact investors and lenders.
- What should investors do? Diversify your portfolio and carefully assess the AI risk exposure of any private credit investments.
Explore our other articles on alternative investments and the future of AI to stay informed about these evolving trends.
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