The AI boom is fueling a surge in private credit, but this trend may be more risky than it seems. The Financial Stability Board (FSB) has issued a stark warning, suggesting that the private credit industry's involvement in the AI sector could lead to significant losses. This is a critical issue that demands attention and careful consideration.
The report highlights a concerning trend: the healthcare, services, and tech sectors, particularly AI firms, have become the largest borrowers of private credit. In 2025, AI companies accounted for over a third of private credit deals, a substantial increase from the previous five years. This specialization in lending exposes private credit funds to unique risks and increases their vulnerability to region- or industry-specific shocks. A sharp correction in asset valuations, driven by rapid increases, could result in substantial credit losses for investors. For instance, a shortfall in electricity supply, a critical resource for datacenters, could trigger project delays or cancellations, impacting the AI industry's growth.
The FSB's concerns extend beyond the AI sector. The report underscores the broader risks associated with private credit, which operates outside the traditional regulated banking system. Private credit firms lend to companies using investor money, not customer deposits or loans backed by them. This model has raised anxieties, leading to significant withdrawals from private credit funds and forced caps on withdrawals. Advocates argue that private credit lenders are better equipped to monitor risks and provide tailored loan arrangements, but the FSB reveals that private credit borrowers often have lower credit scores and higher debt levels than those seeking traditional bank loans.
The integration of traditional banks with the private credit sector is another cause for concern. Banks are lending directly to private credit funds, financing riskier portfolios, or lending to firms borrowing from private credit firms. This exposure to an opaque sector, where lenders may have limited information about borrowers, is exemplified by the recent corporate bankruptcies and failings. The collapse of Tricolor and First Brands, two US automotive companies backed by private credit, resulted in substantial losses for banks like JP Morgan and Barclays. This incident underscores the intricate web of exposures in corporate credit and the potential for widespread financial impact.
In conclusion, the AI boom's reliance on private credit is a double-edged sword. While it provides funding for innovation, it also introduces significant risks. The FSB's warning serves as a reminder that the financial industry must carefully navigate this landscape to avoid a potential correction that could have far-reaching consequences. As the AI industry continues to evolve, regulators and investors must remain vigilant to ensure a sustainable and stable financial environment.
