AI is boosting the stock market. But it’s a threat to private credit Defaults in private credit are projected to increase significantly, driven by factors including the AI cycle and mounting pressure on the software sector, which comprises a substantial portion of the collateralized loans favored by the industry. Money managers and analysts warn that risks are intensifying, with potential fallout impacting retail investors and broader financial markets. Strategies like amend-and-extend are being employed to manage the situation, but some believe a critical point is approaching.

• Private credit defaults are expected to rise from approximately 4.4% to 9-10%.
• The AI cycle and slowing growth in the software sector are key drivers of this projected increase.
• Software accounts for 19% of assets in private credit collateralized loan obligations.
• Retail investors may not be insulated from potential fallout, as banks have significant exposure to private credit.
• Major financial institutions and pension funds have substantial investments in private credit.
• Potential spillover effects from private credit markets into public credit markets are considered underappreciated.