The $2 Trillion Private Credit Threat Hiding Behind the AI Boom

TLDR:

• Private credit funds have grown outstanding AI loans from near zero to over $200 billion in just years.
• The FSB found banks hold up to $500 billion in direct exposure to private credit funds globally.
• Around 10% of private credit borrowers lack the cash flow needed to meet their interest obligations.
• Retail investor participation in private credit surged from near zero to 13% over the past decade.

Private credit has grown into a $2 trillion industry financing some of the largest AI infrastructure projects globally. Regulators and financial watchdogs are now raising alarms about its opacity.

The Financial Stability Board recently released a 49-page report on the sector. Its conclusions were stark. The industry has never been tested during a real economic downturn at its current size. Meanwhile, markets hover near all-time highs, and few investors appear to notice.

AI Infrastructure Boom Fuels Private Credit Expansion

Morgan Stanley estimates global data center construction will reach $2.9 trillion through 2028. About $1.5 trillion of that is expected to come from private credit funds.

Firms like Blackstone, Apollo, Blue Owl, and BlackRock are leading this lending surge. Outstanding loans to AI companies from these funds have now surpassed $200 billion.

The borrowers are mostly mid-sized companies with debt at five to seven times their earnings. Around 10% of them cannot generate enough cash flow to cover interest payments. Furthermore, default rates are rising. None of this, however, shows up in any public market data.

The sector operates entirely in private, without standardized reporting requirements. Valuations are only updated quarterly, with heavy management discretion applied.

There are no public credit ratings for most of these loans. That lack of transparency makes meaningful risk assessment nearly impossible.

As BullTheoryio noted on X, private credit “has never been tested in a real economic downturn at its current size.” The FSB’s report reflected that same concern.

Policymakers admitted they cannot properly monitor the sector. The admission has since drawn renewed scrutiny from financial observers globally.

Bank Exposure and Retail Investor Risk Add to Systemic Concerns

Banks carry far more exposure to private credit than public figures typically suggest. The FSB estimates direct bank exposure to these funds at between $270 billion and $500 billion.

Moreover, roughly half of all private credit borrowers also hold revolving credit lines at traditional banks. A wave of defaults could therefore hit both private funds and banks simultaneously.

Retail investors have quietly entered this space in growing numbers. Their share of the market rose from virtually zero to 13% over the past decade.

Many may not realize their money is locked in illiquid loans to highly leveraged companies. These loans cannot be easily valued or sold during a market crisis.

Several AI data center deals involve off-balance-sheet financing, GPU-backed collateral, and complex leasing structures.

One analyst warned the situation mirrors past cycles of financial opacity. “There is almost no transparency about the financing structures, the scale is astronomical,” the analyst noted.

The S&P 500 currently trades at 23 times forward earnings, with five companies accounting for 30% of the index. AI investment now drives nearly half of U.S. GDP growth. If the boom falters, these losses may not surface in public markets until it is already too late.

The post The $2 Trillion Private Credit Threat Hiding Behind the AI Boom appeared first on Blockonomi.