The private credit market is facing new uncertainties as AI-driven tools begin to put pressure on software companies—a key borrowing segment for private credit lenders. Last week, the software industry came under renewed strain following the release of a new generation of AI tools by artificial intelligence firm Anthropic, triggering a sell-off in shares of software and data service providers. These AI tools developed by Anthropic are designed to perform complex professional tasks that many software companies currently charge for, raising fresh concerns that AI could undermine traditional software business models. As investors worry that AI may disrupt the business models of borrowing firms, compress cash flows, and ultimately increase default risks, shares of asset management companies with significant private credit businesses fell sharply last week. Ares Management dropped more than 12%, Blue Owl Capital declined over 8%, KKR fell nearly 10%, TPG slid roughly 7%, while Apollo Global and BlackRock dropped more than 1% and 5%, respectively. In contrast, the S&P 500 index fell about 0.1%, and the tech-heavy Nasdaq index declined 1.8%. Market observers noted that this round of volatility highlights growing unease in the private credit industry. The sector must contend with the impact of AI on the software industry, which relies heavily on merger and acquisition financing backed by opaque, illiquid loans. Jeffrey Hooke, Senior Lecturer in Finance at Johns Hopkins University's Carey Business School, stated, "Private credit has lent to a large number of software companies. If these businesses start to decline, it will create problems for investment portfolios." In a recent report, PitchBook wrote that since 2020, enterprise software companies have been one of the preferred lending areas for private credit firms. Some of the largest unitranche deals—a structure that combines two or more loans into one—commonly used in the private credit market have involved software and technology companies. Data show that among loans held by US Business Development Companies (BDCs), the software industry accounts for about 17% by number of deals, second only to the business services sector. If the adoption of AI outpaces the ability of borrowing companies to adapt, such exposure could prove costly. UBS Group warned that under an aggressive shock scenario, the default rate for US private credit could rise to 13%, significantly higher than stress-scenario default rates for leveraged loans and high-yield bonds (approximately 8% and 4%, respectively). Hooke also pointed out that stress in private credit did not begin with the latest AI disruption; issues such as illiquidity and loan extensions had already existed. "Many private credit funds have had difficulty realizing loans," he said, adding that the recent AI factor simply adds another layer of risk to an already strained industry. Recent warnings have also emerged regarding the $3 trillion industry, including high leverage, opaque valuations, and the potential for localized issues to evolve into systemic risks. JPMorgan Chase CEO Jamie Dimon previously used a "cockroach" metaphor late last year to warn about private credit risks, suggesting that when one borrower encounters problems, it often indicates more hidden issues. Kenny Tang, US Credit Research Lead at PitchBook LCD, commented, "The disruption from AI could pose credit risks for some software and services borrowers, but not all companies will be affected equally—it depends on whether they are lagging or leading in the AI wave." Tang further noted that software and services companies have the highest proportion of Payment-in-Kind (PIK) loans. PIK structures allow borrowers to defer cash interest payments, typically to give high-growth companies time to expand revenue and cash flow. However, if a company's financial condition deteriorates, deferred interest can quickly become a credit problem. Mark Zandi, Chief Economist at Moody's Analytics, said that due to low transparency in the industry, it is difficult to fully assess risks, but rapid growth in AI-related borrowing, rising leverage, and lack of transparency are clear "yellow warning signs." He added, "There will certainly be credit problems of considerable scale. The private credit industry may still be able to absorb losses reasonably well for now, but if the current credit expansion continues, the situation could be different a year from now."