Private Credit Worries Rise as AI Pressures Software Firms

Concerns are mounting in the $3T private credit market as AI disruption pressures software firms, raising default risks for lenders.

Growing fears over the stability of the $3 trillion private credit market have resurfaced, driven by mounting pressures on portfolio software companies from rapid AI disruption. Lenders and institutional investors are warning that a wave of software firms, which constitute a significant portion of private credit deals, face existential threats from generative AI, leading to heightened default risks and potential valuation collapses.

The shift to AI-native platforms is eroding the competitive moats and revenue models of legacy software-as-a-service (SaaS) companies that took on substantial debt during the low-rate era. Many of these firms are now struggling to adapt, resulting in cash flow deterioration just as they face maturing debt obligations held by direct lenders, business development companies (BDCs), and private credit funds.

Market analysts point to an increase in covenant breaches, amendment requests, and distressed exchanges as early warning signs. “We are seeing the first cracks,” noted the head of credit strategy at a major investment bank. “AI is not just a competitive headwind; it is a fundamental technology shift that is making entire business models obsolete faster than borrowers can repay.”

The situation is testing the resilience of the private credit ecosystem, which flourished by filling the lending void left by traditional banks but is now exposed to concentrated sector risk. While defaults remain below historical averages, the rapid pace of AI innovation has accelerated credit reviews and forced lenders to re-underwrite exposures. Some funds are now setting aside larger reserves and tightening lending standards for new software deals.

Regulators are monitoring the sector closely, concerned that opacity and leverage could amplify a downturn. The stress highlights a critical vulnerability in private markets: the assumption that software cash flows are durable. As AI reshapes the sector, the coming year may see the first major test of private credit’s underwriting rigor since the market’s explosive growth.