The burgeoning role of the private credit industry in the artificial intelligence (AI) sector may face significant challenges, as highlighted by the Financial Stability Board (FSB). In a recent report, the global watchdog, which oversees financial authorities such as central banks across 24 countries, cautioned about potential substantial losses due to a sharp market correction. The report identifies healthcare, services, and technology, including AI companies, as major borrowers of private credit. AI firms have increasingly relied on private lenders to finance essential infrastructure like datacentres, with the industry representing over a third of private credit deals in 2025, a notable increase from 17% in the preceding five years.
The FSB warns that this concentration on specific sectors makes private credit funds vulnerable to unique risks and region or industry-specific economic shocks. A sudden correction in asset valuations, which have surged in recent times, could result in significant credit losses for private credit investors. A potential trigger for such a correction could be any substantial disruption in the electricity supply, crucial for the operation and construction of datacentres, resulting in project delays or cancellations. Furthermore, the report suggests that AI company valuations might suffer if investment oversupply leads to an excess of datacentres, surpassing the actual demand for AI and yielding lower returns for investors.
Concerns are mounting about the risky nature of loans arranged by private credit firms. These firms operate outside the traditional, regulated banking system by using investor capital rather than customer deposits. Recent worries have sparked a multibillion-pound surge in withdrawals from some private credit funds, prompting them to restrict client withdrawals. While proponents claim that private credit lenders are adept at risk management and offering tailored loan solutions, the FSB notes that borrowers in this sector typically possess lower credit scores and face larger debts compared to those seeking loans from traditional banks.
Traditional banks are increasingly entangled with the private credit sector, either by directly lending to private credit funds, financing high-risk portfolios, or providing loans to companies that also borrow from private credit firms. Additionally, more banks are forming partnerships with asset managers to engage in private credit transactions. This interconnectedness raises the stakes for both the private credit industry and the broader financial system, underscoring the need for careful monitoring and risk assessment.