The disruptive wave driven by artificial intelligence technology is extending from the software industry into the depths of financial markets, creating unprecedented uncertainty in the private credit debt market. As AI begins to threaten the business models of traditional software companies, private credit portfolios—a major funding source for the sector—are undergoing severe risk reassessment, raising concerns about the asset quality of the private credit industry, which is valued at up to $3 trillion.

Last week, a new AI tool released by Anthropic triggered a sell-off in shares of software data providers, and the shock quickly spread to the asset management sector. Market fears that AI technology could weaken corporate cash flows and increase default risks led to sharp declines in the stock prices of asset management firms with significant private credit exposure. Ares Management saw its shares drop more than 12% last week, KKR & Co LP fell nearly 10%, Blue Owl Capital declined over 8%, and TPG slid around 7%. In contrast, the S&P 500 index dipped only about 0.1% during the same period.

This market turbulence highlights growing investor unease over exposure to the private credit market. Analysis by PitchBook notes that the software industry has been a favored investment target for private credit institutions in recent years, with many large single-layer loans directed toward such companies. According to previous reports, software accounts for 17% of investment deal volume among U.S. Business Development Companies (BDCs), which specialize in funding small and medium-sized enterprises in the private credit market, second only to business services.

UBS Group has issued a stark warning that if AI-driven disruption accelerates beyond borrowers' ability to adapt, the default rate for U.S. private credit could surge to 13% under an aggressive scenario. This forecast is significantly higher than UBS’s stress-test estimates for leveraged loans (8%) and high-yield bonds (4%), indicating that the private credit market is particularly vulnerable to technological shocks.

The high concentration of private credit exposure in the software sector amplifies any turbulence in the field. Anthropic’s new tool is designed to perform complex professional tasks that are currently fee-generating services for many software firms. This directly challenges the moats of traditional software businesses, raising doubts about their future debt-servicing capacity.

Jeffrey C. Hooke, Senior Lecturer in Finance at Johns Hopkins Carey Business School, noted, “Private credit has provided loans to a large number of software companies. If these companies’ businesses begin to decline, problems will emerge in investment portfolios.” Hooke added that stress in the private credit sector predated AI concerns, with frequent liquidity issues and loan extensions, and that AI introduces an additional layer of risk to an already strained industry.

Kenny Tang, U.S. Credit Research Lead at PitchBook LCD, suggested that AI disruption could pose credit risks for certain software and services borrowers, depending on where companies stand on the AI adoption curve. Firms that fail to keep pace with technological change will face severe challenges.

Beyond sector exposure, loan structures themselves are amplifying potential risks. Tang pointed out that software and services companies account for the largest share of Payment-in-Kind (PIK) loans. This structure allows borrowers to defer cash interest payments, often intended to give high-growth companies time to build revenue streams. However, it becomes highly risky if a borrower’s financial condition deteriorates, as deferred interest can quickly turn into a credit problem.

Mark Zandi, Chief Economist at Moody’s Analytics, warned that the opacity of the private credit market makes it difficult to fully assess its risks. Still, he emphasized that the rapid growth of AI-related lending, rising leverage, and lack of transparency are clear “yellow warning flags.” Zandi expects significant credit issues to emerge and cautioned that if current credit growth continues, the industry may not be able to absorb losses as effectively a year from now.

Systemic concerns are also emerging amid this AI-driven market reassessment. The $3 trillion private credit industry has long faced scrutiny over high leverage and opaque valuations. JPMorgan Chase CEO Jamie Dimon warned late last year that stress in individual borrowers could signal deeper hidden troubles.

A recent PitchBook report noted that corporate software firms have been darlings of private credit institutions since 2020. However, the market must now prepare for AI-driven disruption. This uncertainty is forcing investors to reevaluate acquisitions financed through opaque, illiquid loans, especially those highly exposed to technological change risks.