The expanding role of the private credit industry in driving the AI sector’s growth is under scrutiny, as the Financial Stability Board (FSB) cautions about potential “sizeable” losses from a possible market correction. In a recent report, the global financial watchdog, which supervises financial authorities in 24 nations, revealed that private credit is increasingly tapped by sectors such as healthcare, services, and technology, with AI companies notably becoming significant borrowers.
AI firms have been turning to private lenders to finance essential infrastructure like datacentres, with their share accounting for over a third of private credit deals by 2025, compared to just 17% in the preceding five years. The FSB report highlights that this concentrated lending focus could expose credit funds to specific sector risks and make them vulnerable to shocks confined to certain regions or industries. The report warns that a “sharp correction in asset valuations,” which have been climbing swiftly, could result in notable credit losses for investors in private credit.
Potential triggers for such a correction include significant disruptions in electricity supply, a crucial component for building and operating datacentres, which could lead to project delays or cancellations. Additionally, the FSB points out that AI company valuations might suffer if investment results in an oversupply of datacentres, surpassing AI demand and leading to returns falling short of investor expectations.
This report heightens concerns over possibly risky loans orchestrated by private credit firms, which lend to companies using investor capital rather than customer deposits or loans guaranteed by such deposits, operating outside the traditional banking system’s regulatory framework. Recent anxieties have led to billions in withdrawals from certain private credit funds, prompting some to limit client withdrawals.
Supporters of private credit lenders argue they are adept at managing risks and offering tailored loan solutions. Nonetheless, the FSB notes that borrowers in the private credit sector typically have poorer credit scores and larger debts compared to those seeking loans from conventional banks. Traditional banks themselves are increasingly intertwined with the private credit sector, either by directly lending to private credit funds, financing riskier portfolios, or providing loans to companies that are also borrowing from private credit firms. Simultaneously, a growing number of banks are partnering with asset managers to engage in private credit transactions.