The surge in private credit funding for the AI industry is under scrutiny, with the Financial Stability Board (FSB) issuing a caution about potential financial repercussions. The FSB, a global body that keeps a close eye on the financial practices of authorities such as central banks in 24 countries, identified healthcare, services, and technology as primary borrowers of this credit, and AI companies have significantly contributed to this trend. By 2025, AI enterprises represented over a third of private credit agreements, a substantial increase from 17% in the previous five years. The report highlights the risk of concentrating investments in a few sectors, which could make private credit funds vulnerable to unique risks and susceptible to shocks affecting particular regions or industries.
The FSB’s analysis highlights that AI companies are increasingly relying on private lenders to finance critical infrastructure like datacentres. However, these loans come with risks. Rapid increases in asset valuations could experience a sharp downturn, potentially resulting in significant credit losses for private credit investors. A key factor in this is the supply of electricity, which is crucial for building and running these datacentres. Any major disruption could lead to project delays or cancellations, affecting AI company valuations. An oversupply of datacentres could also occur if investment exceeds the actual demand for AI services, potentially resulting in lower returns for investors.
Adding to the concerns, the report by the FSB sheds light on the hazardous nature of loans orchestrated by private credit firms. These entities lend money sourced from investors, contrasting with traditional banks that rely on customer deposits. This has sparked apprehension, leading to a wave of withdrawals amounting to billions from some private credit funds, prompting them to limit the withdrawal amounts from clients.
Proponents of private credit argue that these lenders possess the expertise to manage risks effectively and offer customized loan solutions. However, the FSB points out that borrowers in this domain often have lower credit ratings and higher debt levels compared to those who secure loans from traditional banks. The interconnectedness between traditional banks and the private credit sector is also on the rise. Banks are increasingly lending to private credit funds, supporting riskier fund portfolios, or providing loans to companies already engaged with private credit firms. In addition, collaborations between banks and asset managers on private credit deals are becoming more common.