The Financial Stability Board has issued a warning about the potential risks associated with the private credit industry’s involvement in the AI boom. The global watchdog’s report highlights the possibility of significant losses if a sharp correction occurs. The healthcare, services, and technology sectors, including AI companies, have become major borrowers of private credit, using these funds for projects like datacentres and infrastructure development. AI firms made up over a third of private credit deals in 2025, a notable increase from previous years, which could expose private credit funds to unique risks and sector-specific shocks.
The report cautions that the rapid rise in asset valuations linked to AI could result in substantial credit losses for investors if a market correction occurs. A potential trigger for such a correction could be a shortage in electricity supply, which is vital for the construction and operation of datacentres. This scenario might lead to delays or cancellations of projects, impacting AI company valuations. Furthermore, an oversupply of datacentres could lead to investor returns falling short of expectations as demand for AI potentially slows.
These findings add to existing concerns about the risky nature of loans facilitated by private credit firms. Unlike traditional banks, which use customer deposits to lend, private credit firms rely on investor money, operating outside the regulated banking system. This has led to a surge in withdrawals from some private credit funds, prompting them to limit the amount clients can withdraw. Advocates argue that private credit lenders are adept at managing risks and offering customized loan arrangements. However, the FSB notes that borrowers in this sector often have lower credit scores and higher debts compared to those using traditional banking avenues.
Traditional banks are also becoming more intertwined with the private credit sector. They engage in direct lending to private credit funds, finance riskier fund portfolios, and lend to firms that simultaneously receive funding from private credit entities. Additionally, more banks are forming partnerships with asset managers to participate in private credit deals. This growing connection between traditional and private credit systems adds layers of complexity and potential risk to the financial landscape.
