AI Upheaval Raises Default Fears Across $3 Trillion Private Credit Market

A fresh round of selling in software and asset-management stocks has revived concerns about the resilience of the roughly $3 trillion private credit market, whose lenders have supplied billions of dollars to enterprise software companies now facing potential disruption from artificial-intelligence tools.

Pressure on the sector intensified after Anthropic rolled out new AI products last week that are designed to perform sophisticated professional tasks—activities that many business-to-business software vendors monetize through subscription fees. The announcement prompted a sharp decline in share prices for data-analytics and software providers, highlighting investor anxiety that AI advances may erode traditional revenue models more quickly than borrowers or their lenders anticipate.

The reverberations quickly reached publicly traded alternative-asset managers with sizeable private credit arms. During the week, shares of Ares Management dropped more than 12%, Blue Owl Capital lost over 8%, and KKR fell almost 10%. TPG declined around 7%, while Apollo Global and BlackRock slipped more than 1% and 5%, respectively. Over the same period, the S&P 500 eased about 0.1% and the Nasdaq Composite retreated 1.8%.

Why software matters to private credit

Enterprise software has been a favored destination for private credit funds since 2020, according to research firm PitchBook. Many of the market’s largest unitranche financings—single-loan structures that bundle senior and junior debt—have funded leveraged buyouts in the software and technology arena. PitchBook data show that software represents approximately 17% of investments held by U.S. business development companies (BDCs) when measured by deal count, second only to commercial services.

That concentration could become problematic if AI-enabled competition outpaces the ability of borrowers to adjust their product offerings or pricing. UBS Group recently modeled an “aggressive disruption” scenario in which the default rate for U.S. private credit climbs to 13%, well above its projections of roughly 8% for broadly syndicated leveraged loans and 4% for high-yield bonds.

“Private credit loans to a lot of software companies,” noted Jeffrey C. Hooke, senior lecturer in finance at Johns Hopkins Carey Business School. “If they start going south, there’s going to be problems in the portfolio.” Hooke added that liquidity challenges and a wave of loan extensions were already weighing on the asset class before the latest AI headlines.

Additional fault lines: leverage and payment-in-kind structures

Beyond potential revenue erosion, lenders must contend with structural features that may magnify credit stress. Kenny Tang, head of U.S. credit research at PitchBook LCD, pointed out that software and services issuers account for the largest portion of payment-in-kind (PIK) loans, which allow borrowers to accrue interest rather than pay it in cash. PIK options are common in fast-growing companies whose cash flow is expected to ramp later, but they can cause indebtedness to snowball if earnings weaken.

Financial textbooks note that PIK interest compounds the principal balance, increasing recovery risk if a borrower ultimately defaults. Because many private credit funds mark such loans at internal valuations rather than observable prices, portfolio values can remain static even as underlying credit quality deteriorates.

The opacity of those marks has drawn repeated warnings from regulators and bank executives. JPMorgan Chase chief executive Jamie Dimon said late last year that isolated credit mishaps could reveal hidden “cockroaches” elsewhere in the market, underscoring the possibility that idiosyncratic problems become systemic once transparency is lacking.

Liquidity concerns and an expanding asset class

Private credit’s rapid growth—assets have roughly tripled since 2015—has been fueled by investor demand for yield and by corporate borrowers’ preference for speed and flexibility compared with traditional bank syndications. The loans, however, are typically illiquid and held to maturity on fund balance sheets. That structure can limit managers’ ability to exit troubled positions quickly, a dynamic Hooke said is already evident as some funds struggle to liquidate or refinance holdings.

Mark Zandi, chief economist at Moody’s Analytics, described the combination of brisk loan origination, rising leverage and scant public information as “yellow flags.” While he believes the industry could likely absorb moderate losses today, the picture could change within a year if credit growth continues at its current pace.

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Market reaction following Anthropic’s rollout

Anthropic’s unveiling of its AI suite triggered a wave of selling in niche software providers that specialize in tasks such as data labeling, code generation and customer support—the very functions the new tools promise to automate. The market response sharpened awareness that AI development cycles are accelerating, compressing the timeline for business-model adjustments across the software landscape.

Although shares of the large asset managers recovered modestly from their intraday lows, last week’s move was sufficient to eclipse the broader market and reprice perceived risk across portfolios heavy in technology debt. Representatives for Apollo, Ares, Blue Owl, TPG and BlackRock did not respond to requests for comment; KKR declined to provide a statement.

Potential policy implications

The intersection of technological disruption and lightly regulated private lending has caught the attention of policymakers. While the Securities and Exchange Commission and the Federal Reserve have not issued new rules specific to private credit, officials have publicly flagged the need for better risk monitoring. Any regulatory shift could influence pricing, documentation standards or reporting requirements for future deals.

For now, market participants are watching how quickly enterprise software borrowers can incorporate generative-AI capabilities into their offerings. Lenders say that companies demonstrating a clear technological roadmap continue to access funding on attractive terms, whereas those perceived as lagging face tighter covenants or higher spreads.

What comes next

Analysts note that the next several quarters will offer a clearer test of private credit’s resilience in the face of AI-driven change. Earnings season for middle-market software firms could reveal whether subscription churn or pricing pressure is materializing faster than anticipated. At the same time, the Federal Reserve’s interest-rate path will influence debt-service capacity, particularly for borrowers with floating-rate obligations.

Should defaults rise meaningfully, the ramifications would extend beyond individual funds. Many institutional investors—public pensions, insurance companies and endowments among them—have allocated large sums to private credit vehicles in search of income. A spike in impairments could therefore ricochet through wider portfolios, potentially amplifying market volatility.

Still, some observers caution against extrapolating last week’s equity moves into an immediate credit crisis. They argue that private credit managers generally structure deals with financial covenants and board observation rights that allow early intervention. Moreover, software businesses often generate recurring revenue streams that can be highly resilient if products remain mission-critical.

The open question is how many existing borrowers can reposition swiftly enough to maintain that status in an AI-enabled environment—and how much latitude lenders are willing to grant during the transition.

Crédito da imagem: Bloomberg via Getty Images