Private credit worries resurface in $3 trillion market as AI pressures software firms

Core Viewpoint - The private credit markets are experiencing increased uncertainty due to the emergence of AI-driven tools that may disrupt traditional software business models, particularly affecting software companies that are significant borrowers in the private lending space [1][2]. Group 1: Impact of AI on Software Companies - AI tools developed by Anthropic are designed to perform complex tasks that many software companies currently charge for, raising concerns about the potential weakening of traditional software business models [2]. - The software sector, which has been a favored area for private credit lenders since 2020, is now facing pressure as AI adoption could accelerate faster than companies can adapt [5][7]. - Software companies account for approximately 17% of loans held by U.S. business development companies, making them a significant focus for private credit lenders [6]. Group 2: Market Reactions and Financial Implications - Shares of major asset managers with substantial private credit franchises have declined significantly, with Ares Management falling over 12%, Blue Owl Capital losing over 8%, and KKR declining almost 10% [3]. - UBS Group has warned that default rates in U.S. private credit could rise to 13% in an aggressive disruption scenario, which is notably higher than the projected stress for leveraged loans and high-yield bonds [7]. - The private credit industry, valued at $3 trillion, is facing concerns over leverage, opaque valuations, and the risk of isolated problems becoming systemic issues [9]. Group 3: Credit Risk and Future Outlook - The potential for credit risk varies among software and services sector borrowers, depending on their position relative to AI advancements [10]. - Payment-in-kind (PIK) loans, which allow borrowers to defer interest payments, are prevalent among software companies, posing risks if their financial situations deteriorate [11]. - Experts indicate that while the private credit industry may currently absorb losses, ongoing credit growth could lead to significant credit problems in the future [13].