The exclusive world of private credit, typically reserved for the wealthy and institutions, is facing growing scrutiny amid fears of AI disruption and potential market instability. Goldman Sachs has sounded the alarm, highlighting concerns about underwriting quality and exposure to the software sector.
Private credit offers high interest rates in exchange for illiquid loans. However, with the software industry facing AI-driven upheaval, investors are marking down private loans, sparking fears of a downward spiral.
Goldman Sachs CEO David Solomon, in his annual shareholder letter, cautioned that these concerns serve as a reminder that the credit cycle remains vulnerable to a default phase.
Several publicly traded private credit firms, known as business development companies (BDCs), have experienced significant declines recently. Giants like Blackstone and Morgan Stanley have even limited investor withdrawals to prevent a liquidity crisis.
Blue Owl Capital (NYSE: OWL), for instance, has plummeted 39% this year. The company restricted investor redemptions following a surge in requests and sold $1.4 billion in assets to meet payouts. This situation exemplifies the contagion risk within the private credit market.
A liquidity crisis could erupt if these private loans cease to perform and the software market endures further AI-driven disruption. The private credit market boasts a valuation exceeding $1 trillion.
A crash in the private credit market could trigger a systemic financial crisis reminiscent of 2008. The International Monetary Fund (IMF) has also warned that banks’ exposure to private credit could spread any fallout to traditional banking institutions.
This private credit unease coincides with growing anxieties surrounding the AI boom. Investors worry that hyperscalers are excessively investing in data centre buildouts, potentially leading to wasted capital. The potential for AI to disrupt enterprise software has already caused valuations in the software sector to plunge.
