Global Watchdog Highlights Risks in Private Credit for AI
Private credit in AI is under the spotlight as a new report from the Financial Stability Board (FSB) raises concerns about the sector’s growing influence on the rapid expansion of artificial intelligence. As AI companies increasingly turn to private lenders for funding, particularly to finance datacentres and essential infrastructure, the global finance watchdog warns that this trend could expose both investors and the broader financial system to significant risks.
Surge in Private Credit Deals for AI Firms
The FSB report reveals that the healthcare, services, and technology sectors have become the largest beneficiaries of private credit. Notably, AI firms accounted for more than a third of private credit deals in 2025, a dramatic increase from 17% over the previous five years. This surge reflects the growing appetite for private credit in AI as firms seek alternative financing outside traditional banking channels to support their rapid expansion.
However, the concentration of private credit in AI and related industries may leave funds vulnerable to sector-specific shocks. The FSB cautions that if asset valuations correct sharply—particularly given their recent rapid rise—private credit investors could face substantial losses. This risk is heightened by the unique dependencies of AI infrastructure, such as the critical supply of electricity required for datacentres. Any disruption in energy supply could delay or halt projects, impacting returns and potentially triggering broader financial instability.
Potential Pitfalls: Oversupply and Asset Valuation Corrections
Another concern highlighted in the FSB’s analysis is the risk of over-investment in datacentre infrastructure. Should the supply of datacentres eventually exceed demand for AI services, valuations could fall, leading to disappointing returns for investors who poured private credit into AI expansion. This dynamic underscores the importance of prudent risk assessment as private credit in AI continues to grow.
Private Credit Versus Traditional Banking
Private credit firms differ from traditional banks in that they lend using investor funds rather than customer deposits or deposit-backed loans. The FSB notes that borrowers in the private credit market typically have lower credit scores and carry higher debt levels compared to those seeking traditional bank loans. While proponents argue that private credit lenders offer more tailored loan arrangements and are better equipped to monitor bespoke risks, the unregulated nature of this market introduces opacity and potential for misjudged lending decisions.
Recent events underscore these risks. The FSB report points to the collapse of private credit-backed companies such as US automotive firms Tricolor and First Brands, both of which subsequently faced fraud allegations. These high-profile failures have raised questions about whether private credit lenders performed adequate due diligence before approving substantial loans.
Banking Sector’s Growing Exposure
Despite the distinction between private credit in AI and traditional lending, banks are increasingly involved in the private credit market. Some banks lend directly to private credit funds or finance riskier portfolios, while others partner with asset managers on private credit deals or lend to companies already borrowing from private credit providers. This growing entanglement increases the potential for contagion if major loans default.
The FSB highlights that banks sometimes have limited information about borrowers in private credit deals, as illustrated by recent bankruptcies and corporate failings. Losses suffered by major institutions—including JP Morgan, Barclays, UBS, and Jefferies—following the collapse of Tricolor illustrate how interconnected the traditional and private credit sectors have become. The failures of Tricolor and First Brands demonstrate the intricate web of exposures and the challenges of adequately managing risk in a less transparent lending environment.
Regulatory Concerns and the Path Forward
The FSB’s warning comes at a time of heightened scrutiny over private credit in AI and its broader implications for financial stability. As investor withdrawals from some private credit funds surge, certain funds have imposed caps to prevent further outflows. Regulators are now keenly focused on ensuring that both private credit providers and banks have robust risk management practices in place, especially as the boundaries between traditional and alternative lending blur.
In conclusion, the rise of private credit in AI is fuelling innovation and expansion in the artificial intelligence sector, but it also introduces new vulnerabilities to the financial system. As the sector grows, careful oversight and prudent risk assessment will be essential to prevent sharp corrections and sizeable losses that could ripple through the global economy.
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