The AI boom, fueled by private credit, is a double-edged sword. While it has injected much-needed capital into the tech sector, it also raises significant concerns about risk and stability. The Financial Stability Board (FSB) has issued a stark warning, highlighting the potential for a sharp correction in asset valuations, which could lead to substantial credit losses for private credit investors. This is particularly concerning given the rapid growth of the AI industry, which accounted for over a third of private credit deals in 2025, up from just 17% in the previous five years.
What makes this situation particularly fascinating is the role of the healthcare, services, and tech sectors as the biggest borrowers of private credit. These sectors, including AI firms, have become increasingly reliant on private lenders to fund datacentres and other critical infrastructure. However, the FSB report warns that this focus on specific sectors may leave private credit funds exposed to idiosyncratic risks and increase exposure to region or industry-specific shocks.
From my perspective, the key issue here is the lack of transparency in the private credit sector. Lenders may have only partial information about borrowers, as illustrated by recent corporate bankruptcies and failings. This opacity is further compounded by the fact that traditional banks are increasingly exposed to the private credit sector, either by lending directly to private credit funds or financing riskier fund portfolios.
One thing that immediately stands out is the potential for a domino effect if a correction occurs. The collapse of two private credit-backed US automotive companies, Tricolor and First Brands, is a stark reminder of how tightly integrated banks can be in the intricate web of exposures in corporate credit. This raises a deeper question: are we witnessing the beginning of a larger financial crisis, or is this just a blip in the AI boom?
In my opinion, the FSB report highlights the need for greater regulation and oversight of the private credit sector. While advocates argue that private credit lenders are better equipped to monitor risks and provide bespoke loan arrangements, the reality is that these lenders may have been too lenient in deciding whether companies were worth lending to. This could have serious implications for the stability of the financial system as a whole.
Looking ahead, it is essential to consider the potential future developments in this area. For example, what will happen if the AI industry experiences a downturn, or if there is an oversupply of datacentres? These are the questions that need to be answered as we navigate the complex and rapidly evolving landscape of global finance.
