"AI disrupting everything" collides with refinancing pressure! Multiple hedge funds warn: software exposure and high interest rates deal a double blow to private credit

Title context: "AI disrupting everything" collides with refinancing pressure! Multiple hedge funds warn: software exposure and high interest rates deal a double blow to private credit Text: Several of the world's larger and more prominent hedge funds are warning that private credit risks in global financial markets are increasing. Against the macro backdrop of heightened scrutiny of private credit investments this year amid the market shock of "AI disrupting everything," these warnings have further fueled discussion about how rising interest rates will affect this asset class. The potential impact of AI on the traditional software business ecosystem and on the global private credit sector, which has relatively high exposure to software stocks, is prompting investors to reassess the earnings sustainability of software companies and the repayment capacity of related loans. As rate expectations and the U.S. Treasury yield curve remain elevated and the debt maturity wall approaches, the private credit sector is undoubtedly facing a dual test of business growth and financing costs. Tony Yoseloff, chief investment officer of Davidson Kempner Capital Management, said on Wednesday at the 2026 Global Financial Leaders' Investment Summit in Hong Kong that private credit currently faces bigger problems than public markets due to higher interest rates, slowing corporate growth, and a massive concentration of debt maturities in 2027 and 2028. Yoseloff said risks also stem from the fact that about one-third of U.S. private credit loans over the past few years flowed into the software industry alongside private equity capital. "It's a software problem, it's an interest rate problem, and it's also an overvaluation problem," he said. Although the private credit industry has expanded rapidly in recent years, it has also seen several high-profile major failures and experienced multiple rounds of redemption pressure, forcing some funds to limit withdrawals. Recently, rising borrowing costs have further intensified concerns and deepened market worries about excessive exposure to software companies, which face potential disruption from AI. Concerns that "AI disrupts everything" are transmitting from software stock valuations to the private credit market. About one-third of U.S. private credit loans over the past few years flowed into the software industry alongside private equity capital, making loan portfolios more exposed to the risk that AI disrupts traditional software business models. Persistently high interest rates continue to increase interest burdens, slowing corporate growth weakens debt-servicing capacity, and the concentration of debt maturities in 2027-2028 will force borrowers to accept new financing pricing. If software companies' revenue expectations and valuations decline simultaneously, refinancing difficulty and loan loss risks may rise further. Some funds have already faced redemption pressure and limited withdrawals, bringing greater scrutiny to the problem of difficult-to-realize underlying assets. Facing risk repricing, hedge funds are still looking for loans with strong cash flow, Asian convertible bonds and selected CCC-rated debt opportunities: high interest rates test borrowers' survival capacity while potentially increasing the risk compensation available to new investors, with the key being whether loan pricing, collateral protection and actual debt-servicing capacity can match. High-rate trajectory meets maturity wall: private credit enters a cash-flow test period Yields on 10-year and longer-dated U.S. Treasuries remain near historic highs after a sharp rise earlier this year, with the 10-year Treasury yield rebounding to about 4.95% on November 3 and falling back to about 4.90% during Asian trading on November 4 as election votes were counted. The sharp short-term rebound in bond prices has not eliminated the high financing costs borne by companies, and expectations that the Federal Reserve may return to rate hikes after announcing a pause in October could push benchmark yields and financing costs steadily higher. Wall Street financial giant Bank of America expects rate hikes of 25 basis points each in December and next March; Sumitomo Mitsui Nikko economists see a single 50-basis-point hike in December as a possible scenario, though not the institution's base case. Hedge fund warnings center on three pressures: higher interest expenses, slowing growth among borrowing companies, and the concentration of debt maturities in 2027-2028. The software industry accounts for about one-third of U.S. private credit loans, and AI disruption risk further amplifies the industry concentration problem. Still, top global fund managers are looking for loans with solid cash flow, Asian convertible bonds and selected lower-rated debt opportunities, and credit risk repricing is widening return dispersion across assets. Hedge funds' vigilance on credit risk is accompanied by the emergence of selective investment opportunities. Davidson Kempner is focused on performing loans with strong cash flow, first-lien guaranteed loans in India and Asian convertible bonds; Farallon believes the AI trade and U.S. rate hikes are creating investment opportunities in some CCC-rated debt. These judgments indicate that high interest rates, on the one hand, increase borrowers' debt-servicing pressure and, on the other, may increase the risk compensation available to new investors, pushing fund managers to allocate credit assets more selectively. John Aylward, chief investment officer of Sona Asset Management, said one warning sign is that the five-year cumulative default rate in the broader syndicated loan market has already exceeded the level seen during the 2008 global financial crisis. He said the private credit market has many of the same private-equity-backed borrowers and alternative credit managers, except that private credit borrowers are smaller and "inherently riskier." "Private markets have had a wonderful run for more than a decade, a world of low rates and less dramatic change. Now we live in a world of higher rates and extremely dramatic change," Aylward said in the same panel discussion. Investors are monitoring private credit fund risks more closely because companies that borrowed heavily during the low-rate era face refinancing pressure as debt maturities arrive. Turning to investment opportunities, Yoseloff said Davidson Kempner's investments are split evenly between U.S. financial markets and overseas markets, and the firm sees a very broad range of performing credit opportunities offering mid-teens returns with strong cash flow. He said the firm's liquidity strategy has invested more in Asia than in Europe for several consecutive years. He stressed that Davidson Kempner is bullish on first-lien guaranteed loans in India and considers Asian convertible bonds particularly attractive. Meanwhile, Nicholas Gioacchini, chief investment officer of Farallon Capital, said that after years of shrinking credit allocations, the fund's credit investment segment has reached a turning point, with the AI trade and U.S. rate hikes creating opportunities in CCC-rated debt. The multi-strategy hedge fund invests in arbitrage, credit and long-short equity opportunities. However, Gioacchini warned against using index-level hedges to address systemic risk, because the October stock market correction was more pronounced at the sector level. He stressed that from Japan to Europe, equity indices are increasingly dominated by AI-related companies, and investors should re-examine the effectiveness of geographic diversification. "Risk commonality around the world is stronger than it was a few years ago," Gioacchini said in a media interview. "AI disrupting everything" compresses the software industry's moat, floating-rate debt erodes debt-servicing buffers Several large global hedge funds are warning that private credit risks are rising. The potential impact of AI on traditional software business models is prompting investors to reassess the earnings sustainability of software companies and the repayment capacity of related loans. As rate expectations and 10-year-plus Federal Reserve yields remain elevated and the debt maturity wall approaches, private credit is facing a dual test of business growth and financing costs. This round of concern stems from AI moving beyond assisted content generation into enterprise workflows such as legal, sales, marketing and data analysis. Early in the year, Anthropic launched related flagship AI application plugins led by the Claude Cowork agent, triggering a market repricing of traditional software subscriptions and per-seat charging models; according to a media report on February 5 earlier this year, the S&P 500 Software & Services Index fell for seven consecutive trading days and had shed about US$1 trillion in market value since January 28. If companies use AI to complete the same tasks with fewer employees and software seats, some software companies' revenue growth and pricing power could come under pressure. For highly leveraged software borrowers, downward revisions to cash flow expectations combined with high interest burdens will also weaken refinancing capacity, transmitting software stock valuation adjustments further into the private credit market. Floating-rate loans in private credit are typically linked to short-term benchmarks such as SOFR, and policy rate increases directly raise borrowers' interest burdens; long-term U.S. Treasury yields affect refinancing pricing and valuations. Research from the Federal Reserve Bank of Boston shows that floating-rate debt accounts for most BDC loan portfolios, and increased interest capitalization also reflects borrowers' cash pressure. From a specific operating mechanism perspective, if cutting-edge AI agents such as Claude Cowork, Muse and ASTRA replace some software functions and renewal rates or per-seat revenue, borrowing companies may suffer both lower profits and higher interest costs. Falling corporate valuations will in turn weaken refinancing capacity. Therefore, investment value depends on cash interest coverage, collateral priority and default recovery capacity, and cannot be judged solely by high coupon rates; cross-regional allocation also needs to be tested for repeated exposure to the same AI industry cycle.