Concern stems from the high number of loans from the software sector
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The rapid growth of AI is creating turmoil in the $3 trillion (€2.5 trillion) private credit market. With AI-driven tools entering the market that can perform tasks traditionally performed by software companies, investors are questioning the stability of borrowers in this sector.
The unveiling of new AI tools by Anthropic last week led to a sell-off in shares of software data vendors. This further highlighted unease about potential disruptions to established business models by AI. These concerns have extended to asset managers with significant private credit exposures, as evidenced by recent share price falls. Ares Management, Blue Owl Capital, KKR, TPG, Apollo Global and BlackRock all experienced noticeable declines.
Since 2020, private lenders have increasingly favoured enterprise software companies. They often provide large unitranche loans, a structure where two or more loans are combined into one. This large exposure to the software sector is now worrying investors, as the adoption of AI threatens to outpace the adaptability of borrowers.
Data from PitchBook shows that software accounts for a significant proportion of loans from US business development companies. They are second only to commercial services. If AI integration proceeds at a rapid pace, this concentration in the software sector could prove detrimental to private lenders. UBS Group has even warned of possible spikes in private credit default rates in the US. These could exceed forecasts for leveraged loans and high-yield bonds in a scenario of rapid AI disruption.
The recent developments in AI have reinforced existing concerns. Yet experts point out that the private credit market was already facing liquidity and credit extension challenges. The introduction of AI only adds complexity to a sector already under pressure.
Business AM