The AI boom is fueling a surge in private credit, but this could be a double-edged sword. While private credit lenders are better equipped to monitor risks and provide bespoke loan arrangements, the Financial Stability Board (FSB) warns that this sector is vulnerable to sharp corrections and significant losses. The healthcare, services, and tech sectors, including AI firms, have become the biggest borrowers of private credit, with AI accounting for over a third of deals in 2025. This focus on specific sectors may leave private credit funds exposed to idiosyncratic risks and increase exposure to region or industry-specific shocks. A sharp correction in asset valuations, which have increased rapidly, could lead to sizeable credit losses for private credit investors. This could be triggered by any significant shortfall in the supply of electricity, a critical factor in the construction and operation of datacentres, which could lead to delays or cancellations of projects. Meanwhile, AI company valuations could be hit if investments lead to an oversupply of datacentres, which eventually outpaces demand for AI, leading to lower-than-expected returns for investors. The FSB report adds to ongoing concerns over potentially risky loans arranged by private credit firms, which lend to companies using investor money outside the traditional regulated banking system. These anxieties recently led to a multibillion-pound surge in withdrawals from some private credit funds, forcing some to cap the amount of money that clients can pull out. While advocates have said private credit lenders are better equipped to monitor risks and provide bespoke loan arrangements, the FSB said private credit borrowers typically had lower credit scores and larger debts than those turning to traditional banks for loans. Traditional banks are increasingly exposed to the private credit sector, either by lending directly to private credit funds, financing riskier fund portfolios, or lending to firms that are simultaneously borrowing from private credit firms. Meanwhile, a growing number of banks are agreeing to partner with asset managers on private credit deals. This has exposed banks to an opaque sector where lenders may have only partial information about borrowers, as illustrated by recent corporate bankruptcies and failings. The global watchdog pointed to last year’s collapse of two private credit-backed US automotive companies, Tricolor and First Brands. Both firms have since been hit with fraud allegations, raising concerns over whether private credit lenders may have been too lenient in deciding whether companies were worth lending to. Banks including JP Morgan and Barclays both suffered losses on the back of Tricolor’s collapse, while others such as UBS and Jefferies reported significant exposures to the failures. The FSB report added that Tricolor and First Brands’ failures together proved how tightly integrated banks can be in the intricate web of exposures in corporate credit. This situation highlights the need for better risk management and transparency in the private credit sector to prevent potential financial crises. As the AI boom continues, it is crucial to ensure that the financial system remains stable and that investors are protected from potential losses. The FSB’s warnings serve as a reminder that the private credit industry must be closely monitored to prevent a sharp correction that could have far-reaching consequences.
