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AI Introduces a New Risk Layer for Private Credit

Artificial intelligence is emerging as a fresh source of uncertainty for the global private credit market, an industry now estimated at roughly $3 trillion in size. While concerns around leverage, liquidity, and opaque valuations have lingered for years, investors are increasingly focused on how AI-driven disruption could undermine one of private credit’s largest borrower groups: software companies.

Private lenders have poured capital into enterprise software over the past decade, drawn by recurring revenues, high margins, and strong cash-flow visibility. AI’s rapid advancement is now challenging those assumptions, raising questions about whether many software firms can defend their business models as automation accelerates.

Software Sector Under Pressure After AI Breakthroughs

Anxiety intensified last week after artificial intelligence company Anthropic unveiled new tools capable of performing complex professional tasks that many software firms currently monetize. The announcement triggered a sell-off across shares of software data providers and analytics companies, highlighting investor fears that AI could replace or commoditize services once seen as indispensable.

These tools are designed to automate functions such as data analysis, research, and workflow management, areas where enterprise software vendors have historically charged premium subscription fees. If customers can achieve similar outcomes at lower cost through AI platforms, revenue growth and pricing power across the software sector could weaken materially.

Market Fallout Hits Private Credit Heavyweights

Publicly listed asset managers with large private credit operations felt the impact almost immediately. Over the past week, Ares Management fell more than 12%, Blue Owl Capital dropped over 8%, and KKR declined nearly 10%. TPG slid roughly 7%, while Apollo Global and BlackRock fell around 1% and 5%, respectively. By contrast, the S&P 500 edged down about 0.1%, and the Nasdaq Composite declined 1.8%.

The underperformance reflects investor concern that stress among software borrowers could ripple through private credit portfolios, pressuring earnings, fundraising, and asset valuations across the sector.

Deep Exposure to Software and Tech Borrowers

Industry data shows why markets are uneasy. Enterprise software has been a favored target for private credit lenders since 2020, particularly in leveraged buyouts financed with unitranche loans, a structure that combines multiple layers of debt into a single, often illiquid instrument.

PitchBook estimates that software accounts for roughly 17% of investments held by U.S. business development companies by deal count, making it the second-largest sector exposure after commercial services. Many of the largest private credit deals on record have been tied to software and technology firms, increasing concentration risk if AI-driven disruption accelerates.

Default Risks Could Rise Sharply

The concern is not just valuation pressure but rising credit stress. UBS has warned that under an aggressive AI disruption scenario, default rates in U.S. private credit could climb as high as 13%. That compares with estimated peak stress levels of around 8% for leveraged loans and roughly 4% for high-yield bonds.

Such a divergence would mark a significant shift, as private credit has historically been marketed as a more stable alternative to public credit markets. A sharp rise in defaults would challenge that narrative and test the sector’s ability to absorb losses.

Payment-in-Kind Loans Add to Fragility

Risk is further amplified by the widespread use of payment-in-kind, or PIK, loans within the software and services sector. These structures allow borrowers to defer interest payments by adding them to the loan principal, a feature often used to support fast-growing companies.

While PIK loans can provide flexibility during expansion phases, they become problematic if revenue growth stalls. Deferred interest can compound quickly, increasing leverage and reducing recovery prospects if a borrower runs into trouble. Software and services companies represent the largest share of PIK exposure in private credit portfolios, making them particularly vulnerable if AI weakens cash flows.

Structural Issues Were Already Building

Market observers note that AI is not the sole issue facing private credit. Liquidity constraints, loan extensions, and limited secondary-market trading have been persistent challenges. Many funds have struggled to exit positions or accurately mark valuations due to the opaque nature of privately held loans.

Warnings from industry leaders have added to the unease. JPMorgan CEO Jamie Dimon previously cautioned that isolated credit problems in private markets could be early signs of broader, hidden stress, describing them as “cockroaches” that often appear before larger infestations are discovered.

A Sector at a Crossroads

Economists and credit analysts say the industry may be able to manage near-term losses, but the margin for error is shrinking. Rapid growth in AI-related borrowing, rising leverage, and limited transparency are increasingly viewed as cautionary signals rather than manageable risks.

If AI adoption outpaces the ability of software borrowers to adapt their products and pricing models, private credit could face a more sustained period of stress. What was once seen as a defensive, yield-enhancing corner of the market is now confronting a technological shift that could reshape its risk profile for years to come.

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