The private credit industry’s role in promoting the AI boom could backfire and a sharp correction could lead to “substantial” losses, the Financial Stability Board has warned.
A new report on private credit by the international watchdog, which oversees financial authorities, including central banks, in 24 countries has found that the health, services and technology sectors are the biggest borrowers of private credit.
That includes AI companies, which are increasingly relying on private lenders to fund data centers and other infrastructure. The AI industry will account for more than a third of private credit transactions in 2025, up from 17% in the previous five years. “A focus on specific sectors can expose private credit funds to idiosyncratic risks… [and] “This increases the likelihood of exposure to region- and industry-specific shocks,” the report said.
Regarding AI financing, the FSB warned that “a sharp correction in rapidly rising asset valuations could result in significant credit losses for private credit investors.”
“This could be caused by a significant shortage of electricity supply, which is a key element in the construction and operation of data centres, and could lead to project delays or cancellations,” the FSB said.
On the other hand, AI companies’ valuations could take a hit if their investments lead to an oversupply of data centers that ultimately exceed demand for AI and investors’ returns are lower than expected.
The FSB report adds to concerns about potentially risky loans arranged outside the traditional regulated banking system by private credit companies that use investor funds to lend to businesses, rather than customer deposits or loans backed by those deposits. Such fears have recently led to a surge in withdrawals from some private credit funds into the billions of pounds, forcing some funds to limit the amount their customers can withdraw.
While proponents argue that private credit lenders are better able to monitor risks and offer tailored financing arrangements, the FSB said private credit lenders typically have lower credit scores and greater debt than borrowers who seek loans from traditional banks.
However, traditional banks are increasingly exposed to the private credit sector by lending directly to private credit funds, lending to riskier fund portfolios, or lending to companies that simultaneously borrow from private credit companies. Meanwhile, more banks are agreeing to partner with asset managers on private credit transactions.
This exposes banks to an opaque sector “where lenders may have only partial information about their borrowers, as seen in recent corporate bankruptcies and bankruptcies,” the FSB said.
The global watchdog noted that two credit-backed private U.S. car companies, Tricolor and First Brands, collapsed last year. Both companies have since faced fraud allegations, raising concerns that private credit lenders were too lenient in determining whether companies were worth lending to. Banks such as JPMorgan and Barclays suffered losses as a result of the Tricolor collapse, while other banks such as UBS and Jefferies also reported large exposures from the collapse.
The FSB report added that the failures of Tricolor and First Brands both demonstrated “how tightly integrated banks can be within a complex web of exposures in corporate credit”.
