The financial landscape is witnessing a significant shift as artificial intelligence (AI) firms increasingly turn to private lenders for funding essential infrastructure, including data centres. A recent report from the Financial Stability Board (FSB) underscores the potential risks associated with this trend, signalling that the rapid expansion of private credit in sectors like technology and healthcare could lead to substantial losses in the event of a market correction.
The Rise of Private Credit in the AI Sector
As AI technologies continue to dominate the market, private credit has emerged as a vital source of financing. The FSB report highlights that in 2025, AI-related enterprises accounted for over one-third of all private credit transactions, a marked increase from just 17% in the preceding five years. This surge in borrowing reflects the industry’s urgent need for capital to build the infrastructure necessary to support its ambitious growth plans.
The FSB’s analysis reveals that sectors such as healthcare, services, and technology are now the leading borrowers in the private credit space. However, this concentrated focus on a few key industries raises concerns about the vulnerability of private credit funds to specific market shocks. The FSB cautioned that such exposure could amplify the risks associated with sector-specific downturns.
Potential Dangers Ahead
One of the most pressing warnings from the FSB pertains to the potential for significant credit losses should a sharp decline in asset valuations occur. The report suggests that a critical factor in this scenario is the availability of electricity, which is essential for the operation of data centres. Any disruptions in power supply could lead to project delays or cancellations, thereby jeopardising the financial stability of AI firms reliant on timely infrastructure development.
Furthermore, the report raises alarms about the risk of overcapacity in the market. If the pace of data centre construction outstrips the actual demand for AI services, valuations of AI companies may plummet, leaving investors facing lower-than-expected returns. This could trigger a cascade of financial challenges across the sector, particularly for those heavily reliant on private credit.
The Risks of a Less Regulated Landscape
The FSB’s report also casts a critical eye on the private credit market’s growing prominence outside traditional banking regulations. Private lenders, which often utilise investor funds rather than customer deposits, may lack the rigorous oversight that characterises conventional financial institutions. This has resulted in an increase in risky loans, raising questions about the creditworthiness of borrowers in this space.
Alarmingly, some private credit funds have recently experienced substantial withdrawals, prompting them to impose caps on client withdrawals to manage liquidity. While proponents of private credit argue that these lenders are more adept at tailoring loan agreements and monitoring risk, the FSB notes that borrowers from this sector typically possess weaker credit profiles and higher debt levels compared to those seeking traditional bank loans.
Banking Sector’s Growing Exposure
As the private credit market expands, traditional banks are increasingly drawn into this complex web of financing. Many banks have begun lending directly to private credit funds, financing higher-risk portfolios, or simultaneously providing loans to companies that are also borrowing from private credit sources. This interconnectedness raises concerns about the transparency and risk management practices within the private credit sector.
Recent corporate failures, such as those of Tricolor and First Brands—two US automotive firms backed by private credit—have highlighted the potential pitfalls of this arrangement. Both companies faced fraud allegations, raising doubts about the thoroughness of lenders’ evaluations before extending credit. This has resulted in notable financial repercussions for banks like JP Morgan and Barclays, who reported losses linked to these collapses, underscoring the precarious nature of their involvement.
Why it Matters
The FSB’s findings highlight a critical juncture for both the AI and private credit sectors. As AI companies aggressively pursue funding to scale operations, the reliance on private credit introduces a layer of risk that could have far-reaching implications. Should the market experience a downturn, the interconnectedness of banks and private credit could exacerbate financial instability, not just within the tech sector, but across the broader economy. This situation calls for heightened scrutiny and perhaps regulatory intervention to ensure that the growth of innovative technologies does not come at the expense of financial security.
