AI Disruption Rekindles Credit Risk Fears in the $3 Trillion Private Credit Market

Private credit markets are facing renewed scrutiny as rapid progress in artificial intelligence begins to pressure software companies that rely heavily on private lending. The latest wave of concern emerged after AI firm Anthropic introduced new tools capable of performing professional tasks traditionally monetized by software providers, prompting a sell-off in software-related stocks.

The market reaction quickly spread to asset managers with large private credit businesses. Shares of Ares Management, Blue Owl Capital, KKR and TPG fell sharply last week, while Apollo Global and BlackRock also declined. The sell-off contrasted with relatively modest moves in broader equity benchmarks, highlighting investor anxiety specific to private credit exposure.

Market watchers say the unease reflects the private credit industry’s heavy concentration in software and technology lending. According to PitchBook, enterprise software has been a favored sector for private credit since 2020, with many of the largest unitranche loans — a hallmark structure of the market — extended to software and tech firms. Data shows software accounts for roughly 17% of U.S. business development company loan portfolios by deal count.

That exposure could become problematic if AI adoption outpaces borrowers’ ability to adapt. UBS Group has warned that in a severe disruption scenario, default rates in U.S. private credit could climb as high as 13%, significantly above stress projections for leveraged loans and high-yield bonds.

Jeffrey C. Hooke, a senior lecturer at Johns Hopkins Carey Business School, said many private credit portfolios are heavily tilted toward software. If those borrowers begin to struggle, he warned, the impact could ripple through lenders’ balance sheets. He added that issues such as limited liquidity and repeated loan extensions were already present before AI became a dominant concern.

The renewed anxiety builds on longer-standing worries about the $3 trillion private credit market, including high leverage, opaque valuations and the risk that isolated borrower problems could signal deeper systemic stress. JPMorgan CEO Jamie Dimon previously cautioned that hidden weaknesses — his so-called “cockroaches” — could emerge under pressure.

Analysts also point to the prevalence of payment-in-kind (PIK) loans in software lending. PitchBook noted that software and services companies account for the largest share of these structures, which allow borrowers to defer interest payments. While useful for fast-growing firms, PIK loans can quickly amplify credit risk if cash flows deteriorate.

Moody’s Analytics chief economist Mark Zandi said that although the private credit sector can likely absorb near-term losses, rapid credit growth, rising leverage and limited transparency are warning signs. He cautioned that the industry’s resilience could be tested further if current trends continue.

Some lenders argue their exposure is manageable. Ares Management CEO Michael Arougheti said software loans make up a small portion of the firm’s assets and that its strategy focuses on profitable companies with strong cash flow and conservative leverage.

Still, as AI continues to reshape the software landscape, investors are increasingly questioning whether private credit portfolios — built during years of easy capital and stable business models — are adequately prepared for a faster, more disruptive shift.