The AI boom, fueled by private credit, is a double-edged sword. On one hand, it's a testament to the sector's resilience and innovation. On the other, it's a ticking time bomb, with the potential for a sharp correction that could lead to significant losses. This is the warning from the Financial Stability Board (FSB), a global watchdog, which has raised concerns about the private credit industry's role in financing AI firms. While the AI industry has become a major borrower of private credit, accounting for over a third of deals in 2025, the FSB report highlights the risks associated with this trend. The healthcare, services, and tech sectors, including AI firms, have been the biggest borrowers, but this focus on specific sectors may leave private credit funds exposed to idiosyncratic risks. In my opinion, this is a critical issue that needs to be addressed. The FSB's warning about the potential for a sharp correction in asset valuations is particularly concerning. A significant shortfall in electricity supply, a critical factor in the construction and operation of datacentres, could lead to delays or cancellations of projects, triggering a credit loss for private credit investors. This raises a deeper question: How can we ensure that the AI boom is sustainable and doesn't lead to a bubble that could burst with devastating consequences? The FSB's report adds to ongoing concerns about the private credit industry, which lends to companies using investor money outside the traditional banking system. This sector has recently faced a surge in withdrawals, forcing some funds to cap withdrawals. While advocates argue that private credit lenders are better equipped to monitor risks, the FSB points out that borrowers typically have lower credit scores and larger debts than those using traditional banks. This raises a critical issue: How can we ensure that private credit lenders are not taking on too much risk, and how can we protect investors from potential losses? The FSB's report also highlights the exposure of traditional banks to the private credit sector. Banks are lending directly to private credit funds, financing riskier portfolios, and partnering with asset managers on deals. This creates a complex web of exposures, as illustrated by the collapse of Tricolor and First Brands, two US automotive companies backed by private credit. The FSB's report adds that these failures prove how tightly integrated banks can be in the intricate web of exposures in corporate credit. In my view, this is a wake-up call for the industry. The AI boom is an exciting development, but it must be managed carefully to avoid a bubble. The private credit industry has a critical role to play in financing innovation, but it must do so in a way that ensures sustainability and protects investors. The FSB's report is a reminder that we must be vigilant and proactive in addressing the risks associated with this trend. It's a delicate balance between fostering innovation and ensuring financial stability. Personally, I think that the FSB's report is a call to action for the industry. We must work together to develop a more robust and transparent private credit sector, one that can support the AI boom while protecting investors and ensuring financial stability. The future of AI depends on it.
