The burgeoning role of the private credit sector in financing the artificial intelligence (AI) industry could face significant setbacks, according to a warning from the Financial Stability Board (FSB). This international entity, responsible for overseeing financial authorities across 24 countries, highlighted in its recent report that sectors such as healthcare, services, and technology are now the largest recipients of private credit. AI companies, in particular, have increasingly relied on private lenders to support the construction of data centers and related infrastructure. By 2025, the AI sector is expected to account for over a third of private credit deals, a notable rise from 17% during the previous five years.
The FSB cautioned that the concentrated focus on specific industries might leave private credit funds vulnerable to unique risks and susceptible to shocks tied to particular regions or sectors. The report specifically pointed to the AI sector, suggesting that a sharp correction in the rapidly rising asset valuations could result in substantial credit losses for private credit investors. The report also warned that any significant disruption in electricity supply, which is crucial for the operation and construction of data centers, might trigger delays or cancellations of projects, exacerbating financial risks.
Furthermore, the FSB noted the potential for AI company valuations to be adversely affected if investments lead to an oversaturation of data centers. Such an oversupply could exceed the demand for AI, ultimately reducing returns for investors. This report adds to growing concerns about potentially unstable loans orchestrated by private credit firms, which typically secure funding from investors rather than relying on customer deposits or loans backed by those deposits, operating outside the conventional regulated banking system.
These apprehensions have recently caused a multibillion-pound wave of withdrawals from some private credit funds, prompting certain funds to limit how much clients can withdraw. While proponents argue that private credit lenders are adept at managing risks and tailoring loan arrangements, the FSB pointed out that borrowers in the private credit sector often have lower credit scores and higher debt levels compared to those seeking loans from traditional banks.
Traditional banks, meanwhile, are becoming increasingly entwined with the private credit market. They are either directly lending to private credit funds, providing financing for riskier fund portfolios, or lending to companies that also seek funding from private credit firms. Additionally, a growing number of banks are partnering with asset managers on private credit deals, deepening their involvement in this sector.