Private Credit and the Impact of AI on Funds

The private credit sector has reached a crossroads. For over a decade, this asset class was one of the main success stories coming out of the 2008 financial crisis. As traditional banks retreated under stricter regulations, private lenders stepped in to fill the gap, offering mid-sized companies the flexibility they couldn’t find elsewhere. This shift fueled a massive expansion, turning private credit into a $2 trillion market. However, that period of unchecked growth is now meeting a series of significant headwinds.

Much of the current concern stems from heavy exposure to the technology sector, particularly software companies. For years, SaaS was considered very stable because of its recurring revenue. But the landscape has shifted with the rise of AI. There is a growing concern that AI could disrupt these traditional business models and erode valuations, making the debt these companies carry look much riskier. Compounding this is the fact that most of these loans have floating interest rates, meaning many borrowers are now struggling under debt payments that have remained elevated for far longer than anyone anticipated.

The consequences of these pressures are becoming visible across the industry. We have seen significant volatility, including the 50% decline in Blue Owl’s stock and instances where major players like BlackRock have had to limit investor withdrawals. Perhaps most concerning are the high-profile bankruptcies of companies like First Brands and Tricolor, which involved allegations of fraud. These events have sparked comparisons to the 2008 financial crisis.

While the situation is serious, the idea that this is a repeat of 2008 is, in my view, an overreaction. Private credit funds operate with significantly less debt than the banks of the past, and they aren’t as deeply interconnected with the rest of the global financial system. What we are seeing is likely not a total breakdown, but rather a series of stressed pockets within specific industries.

Much of the current panic also stems from investor sentiment regarding withdrawal caps. When funds limit withdrawals to between 0–15%, it can look like they are refusing to pay back investors. In reality, this is often a gap in liquidity versus solvency. Because these assets are private loans, they take months or years to sell. The money isn’t gone, it’s just not immediately available.

The future of the market remains to be seen, but I expect we will see struggling funds begin to consolidate. Moving forward, we will likely see tighter terms and increased regulation to prevent a similar crunch. While some might blame the funds for their current exposure, it’s worth remembering that SaaS presented a very different risk profile twenty years ago. Private credit might struggle for some of the foreseeable future, but this is a healthy reset for the long term.