The private credit industry's role in fueling the AI boom is a double-edged sword, and the Financial Stability Board (FSB) is sounding the alarm. While private credit has been instrumental in propelling the AI sector forward, the watchdog warns of a potential backlash. In my opinion, this is a critical juncture that demands our attention, as the consequences of a correction could be far-reaching. The healthcare, services, and tech sectors, particularly AI firms, have become the biggest borrowers of private credit. This shift has led to a significant increase in private credit deals, with the AI industry accounting for over a third of these deals in 2025, up from 17% in the previous five years. What makes this particularly fascinating is the rapid growth of the AI sector, which has outpaced traditional funding sources. However, this focus on specific sectors may leave private credit funds exposed to idiosyncratic risks and increase exposure to region or industry-specific shocks. The FSB highlights a critical concern: 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. In my view, this raises a deeper question about the sustainability of the AI boom and the role of private credit in fueling it. The AI industry's reliance on private credit is not without risks. If investments lead to an oversupply of datacentres, which eventually outpaces demand for AI, it could result in lower-than-expected returns for investors. This scenario could have significant implications for the broader financial system, as private credit funds may face substantial losses. The FSB's 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 have already 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 argue that private credit lenders are better equipped to monitor risks and provide bespoke loan arrangements, the FSB points out that private credit borrowers typically have lower credit scores and larger debts than those turning to traditional banks for loans. This raises a critical question about the quality of lending practices in the private credit sector. 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. This exposure has led to a complex web of interconnected risks, as illustrated by the collapse of Tricolor and First Brands, two private credit-backed US automotive companies. The FSB report highlights how tightly integrated banks can be in the intricate web of exposures in corporate credit. In my opinion, this incident serves as a stark reminder of the potential consequences of a lack of transparency and oversight in the private credit sector. The FSB's warnings should not be taken lightly. The private credit industry's role in fueling the AI boom is a delicate balance, and a correction could have significant implications for the financial system. As we navigate this complex landscape, it is crucial to consider the broader implications and potential risks associated with private credit lending. The future of the AI sector and the stability of the financial system may depend on how we address these concerns.
