A research note from UBS Investment Bank warning about the potential disruption in artificial intelligence has sparked alarm in the approximately US$3 trillion global private credit market.
According to Matthew Mish, head of credit strategy at the bank, rapid and severe disruption in AI could trigger default rates of as much as 14%-15% in private credit loans.
This came after Jamie Dimon, chief executive officer of JPMorgan Chase, warned of “dumb stuff” in the private credit market reminiscent of the 2008 global financial crisis. Specifically, he cited inexperienced entities chasing returns without proper awareness of risk.
Comparisons are already being made with the financial crisis and the dotcom bubble two decades earlier. Mish’s analysis appears based on average default rates in US credit, as well as specific experience when the most exposed sectors – in this case, software and business services – are hit by disruptive upsets and default waves.
Fitch Ratings noted recently that US private credit default rates have risen to the highest level since tracking began in August 2024.
A major concern about private credit is the experience of fund managers in the asset class. They are relatively new to high-volume private investment, which needs consistent hands-on operational servicing, unlike, for example, private equity. Loan portfolio management requires a fundamentally different skill set from buying and running investee companies.
Many institutions have piled into private credit since private equity returns started to suffer in the past few years.
In principle, private credit loan repayments offer more stable, predictable returns than private equity liquidity events. In practice, securing those returns requires appropriate skills and insight into creditworthiness.
Here, there is the intrinsic problems of an asset class that has grown fast, allied with the extra problems of exposure to disruptive AI technology. Equity investors have already started to punish technology companies over their leverage levels as they seek financing to build out the capabilities needed to capture AI opportunities.
To be sure, private credit in itself may not be enough to precipitate a crash. But the dangers of wider contagion as companies fail and stock market valuations fall from their highs are real, as are the risks for investors in the asset class.
Mish’s default level predictions assume that widespread AI disruption actually happens. But Dimon’s comments along with other warnings suggest there are already enough risks and causes for concern about private credit even without an AI-pocalypse.
Private credit investors had best be warned, and be prepared.
