Private credit investors are facing exposure to artificial intelligence (AI) disruption that extends well beyond software and technology companies, according to new research from KBRA, which looked at over 2,400 middle market borrowers.
The analysis, which covered loans held in collateralised loan obligations, business development companies, and direct lending funds, found that the software sector represents 22 per cent of total debt exposure in KBRA’s assessment portfolio, or around $224bn (£165bn), and it said this is most impacted by AI. However, it found that AI-related risks are spreading across other sectors too.
“The software sector is likely the most exposed to AI risks; however, exposure extends beyond technology companies. Companies in other industries, notably health care services and technology, commercial and professional services, and media, are also facing AI-related disruption,” it said.
Read more: Private credit firms take hit on exposure to software selloff
“AI-enabled alternatives may pressure pricing, retention, and margins, regardless of whether the borrower is formally classified as a software company…even well-positioned investors may face exit or refinancing risk if market uncertainty around AI delays realisations or depresses valuations, creating incremental pressure on returns,” it added.
However, it said that for lenders, valuation-dependent sponsor support still appears present. “We are closely monitoring the situation as liquidity injections act as the primary deterrent to defaults and losses for lenders,” the firm said.
KBRA’s analysis leveraged direct access to financial statements, investment memoranda, and credit agreements, which it said enabled more precise industry classifications than manager-defined labels typically used in public reporting.
Read more: Private market allocations rise as DC funds turn to debt
The report also highlighted opportunities emerging from AI adoption. Several direct lending borrowers have already achieved margin improvements and revenue benefits through automation and AI deployment.
“These gains suggest companies that combining AI capabilities with proprietary data and embedded customer relationships may enhance scalability and profitability – although it remains too early to assess the durability for each company,” it said.
Read more: Can AI address private credit fraud?
